Iceland’s New Kilometer Road Tax: What You Need to Know

If you’re planning to rent a car in Iceland from 1 January 2026, you’ll notice a new government-mandated charge linked to road usage. This is the kilometer road tax, a national regulation that applies to all vehicles, including rental cars.

This isn’t a policy created by car rental companies. It’s a country-wide shift in how Iceland funds and maintains its road network. The role of rental companies is simply to apply the tax correctly, explain it clearly, and make sure your trip stays smooth and predictable.

This guide explains what the kilometer road tax is, why Iceland is introducing it, how it applies to rental cars, and what it means for your Iceland road trip.

Key Facts at a Glance

The kilometer road tax is a mandatory Icelandic government charge used to fund road maintenance and transport infrastructure across the country.

From 2026, Iceland will move away from traditional fuel taxes and introduce a distance-based road usage tax that applies to all vehicles, including electric and hybrid cars.

For rental cars, the tax can be applied either per kilometer driven or as a fixed daily rate based on average driving distances. 

At Lava Car Rental, the tax is applied as a flat daily rate to keep costs predictable and stress-free, with no mileage tracking and no limits on how far you can drive.

What Is Iceland’s New Kilometer Tax?

The kilometer road tax is a usage-based road charge introduced by the Icelandic government to support the long-term maintenance of the country’s road network.

Until now, road funding in Iceland mainly came from fuel taxes included in petrol and diesel prices. Electric and plug-in hybrid vehicles, however, contributed far less under this system, even though they use the roads just as much.

As more drivers switch to electric and fuel-efficient vehicles, revenue from fuel taxes has dropped significantly. The kilometer road tax ensures that all vehicles contribute fairly, based on road usage rather than fuel consumption.

This tax is mandatory and applies to all car rental companies operating in Iceland. For a government-level explanation, you can also visit the official Our Roads to the Future website.

Iceland is widely considered a global pioneer in this approach, moving toward a nationwide distance-based road usage charge rather than relying on traditional fuel taxes.

Why Iceland Is Introducing This Tax Now

The Rise of Electric and Hybrid Vehicles

Iceland has one of the highest rates of electric vehicle adoption in Europe. While this is a positive environmental shift, it has significantly reduced revenue from fuel-based road taxes.

Challenging Road Conditions

Iceland’s roads face extreme weather, strong winds, freeze–thaw cycles, volcanic and glacial terrain, and heavy seasonal tourism. Maintaining safe and reliable roads across the country requires a funding model that works in the long term.

A Fairer System for All Drivers

By linking road contributions to actual usage rather than fuel type, the kilometer road tax spreads costs more evenly across all drivers.

How the Kilometer Road Tax Applies to Rental Cars

While the kilometer road tax is based on distance driven, rental car companies in Iceland can choose how they implement it. The tax can either be calculated per kilometer driven or applied as a flat daily fee based on average driving distances.

At Lava Car Rental, the tax is applied as a fixed daily rate. This is the simplest, clearest, and most traveller-friendly option, and it reflects how people actually explore Iceland.

How Much Is the Kilometer Tax?

Government Rate for Passenger Vehicles

For passenger vehicles under 3.5 tonnes — which includes the vast majority of rental cars in Iceland — the government-set rate is 6.95 ISK/kilometer driven. 

This per-kilometer rate is the basis of the kilometer road tax nationwide.

Lava Car Rental’s Flat Daily Rate

Rather than charging per kilometer, Lava Car Rental applies a flat daily rate, calculated using real travel data. On average, travellers in Iceland drive around 200 kilometers per day.

Based on this average, the kilometer road tax with Lava Car Rental is: 1,390 ISK/ day, or around €9.50/day or Around $11/day

This daily rate stays the same whether you drive a little less or take the long scenic route. There’s no need to track kilometers, and there are no surprises at the end of your rental.

Why Lava Car Rental Uses a Flat Daily Rate

Why We Don’t Charge Per kilometer

Per-kilometer charging can make a road trip feel more like watching a taxi meter than enjoying an adventure. Travellers often find themselves checking the odometer, second-guessing scenic detours, or worrying about unexpected costs at drop-off.

With a flat daily rate, you know the cost upfront and can drive as much as you like. Whether you take the long way around a fjord or stop at one extra waterfall (or three), the price stays the same.

That means total freedom on the road, without the mental maths.

Daily Rate vs Per-kilometer Charging

A flat daily rate removes uncertainty and fits how people actually plan trips in Iceland.

Why a Daily Rate Is Fairer for Travellers

In Iceland, road trips are planned by days, not by kilometers.

Whether you’re doing a short Golden Circle loop, driving the full Ring Road, or exploring remote regions at your own pace, a daily rate ensures consistency and fairness. Two travellers renting the same car for the same number of days won’t end up paying wildly different amounts just because one followed a longer scenic route.

Electric and Hybrid Rental Cars

Electric and plug-in hybrid vehicles are not new to kilometer-based road taxation in Iceland. In fact, since 2025, these vehicles have already been subject to a distance-based tax to compensate for the fuel taxes they do not pay.

The change coming in 2026 is not about introducing a brand-new charge for electric and hybrid cars, but about aligning all vehicles under one unified system. From 2026 onwards, petrol, diesel, hybrid, and electric vehicles will all contribute to road maintenance through the same kilometer-based framework.

For renters, the process remains straightforward. Electric and hybrid rental cars follow the same rules and pricing structure as other vehicles, with no additional steps, paperwork, or reporting required.

If you’re considering an EV for your trip, our guide to renting an electric car in Iceland covers charging, range, and route planning to help you decide if it’s the right fit for your itinerary.

Full Transparency From Booking to Return

Transparency is key when travelling somewhere new.

For bookings made before 1 January 2026, the kilometer road tax will be settled at pick-up. The amount is clearly explained on arrival, with no hidden charges.

For bookings made on or after 1 January 2026, the kilometer road tax is included directly in the booking funnel. This means the full cost is visible upfront when you book your rental car.

In all cases:

• The tax is handled automatically as part of your rental
• There is no tracking of your route or driving behaviour
• Rental companies do not profit from this tax; it is collected on behalf of the Icelandic government and passed through exactly as required by law

There are no hidden fees, no penalties for heavy usage, and no awkward conversations at drop-off.

Will The Kilometer Tax Make Driving in Iceland More Expensive?

For most visitors, the impact will be small and predictable.

While there is an added road usage fee, fuel taxes are expected to decrease as the system transitions. Overall, the change is designed to rebalance costs rather than significantly increase them. In practice, you’ll pay a bit more through your rental and less at the petrol station.

Compared to guided tours, renting a car in Iceland still offers outstanding value and flexibility.

What You Need to Do as a Traveller

There’s nothing extra you need to do to comply with the new law.

• If you booked your rental before 1 January 2026, the kilometer road tax will be paid at pick-up. Everything is explained clearly when you collect your car, with no extra steps required.
• If you book on or after 1 January 2026, the kilometer road tax is included directly in the booking funnel, so the full cost is visible upfront.

In both cases, there is no registration required and no paperwork at pick-up or drop-off. Your focus can stay where it should be: choosing the right vehicle and planning a safe route.

If you’re unsure whether your itinerary requires a larger vehicle, our guide on whether you need a 4x4 rental in Iceland can help. Before setting off, we also recommend reading our Driving in Iceland guide for practical tips, road conditions, and safety advice.

Final Thoughts

Iceland is best explored at your own pace, with the freedom to stop, detour, and adapt to changing weather and road conditions. The new kilometer road tax is simply part of maintaining the road network that makes that freedom possible.

For travellers, the experience remains the same:

• Open roads
• Epic landscapes
• Clear, predictable costs

Rent your car, enjoy the drive, and let Iceland do the rest.