Planning to rent a car in Iceland? Learn how Iceland’s new road tax works, why it was introduced, how it affects tourists, and how you can save money on your rental. I’ll also explain why not all rental car companies charge the fee the same way and share my recommendations after living in Iceland for the past 10 years.

One of the biggest reasons I recommend renting a car in Iceland is the freedom it gives you.

Some of my favorite memories have come from pulling over at an unexpected waterfall, taking a detour because someone mentioned a hidden canyon, or completely changing my plans after seeing that the weather was better in another part of the country.

Those spontaneous moments are often the highlights of an Iceland trip.

That’s why, when Iceland introduced a new road fee at the beginning of 2026, I immediately started getting questions from members of the All Things Iceland community.

People wanted to know:

What exactly is Iceland’s new road tax?
Why did Iceland introduce the road tax fee?
Does it apply to tourists?
How much will it cost?
Should I still rent a car?
How to budget for Iceland’s new road tax fee
How can you save on a rental car in Iceland?

If you’ve been wondering the same thing, you’re definitely not alone.

In this guide, I’ll explain everything you need to know about Iceland’s new road fee, including why it was introduced, how it works, how it affects tourists renting cars and camper vans, how different rental companies handle the fee, and some practical ways to save money while planning your Iceland road trip.

https://youtu.be/oqXebmLiA38

What Is Iceland’s New Road Tax?

Although you’ll often hear people, including me, refer to it as Iceland’s new road tax, the official name is the kilometer fee, or kílómetragjald in Icelandic.

The fee officially came into effect on January 1, 2026, and it’s designed to help fund Iceland’s road infrastructure in a different way than before.

Under the standard government system, most passenger vehicles are charged 6.95 ISK per kilometer driven, although rates vary depending on the vehicle’s weight and classification.

Unlike a toll road where you stop to pay at a booth, this fee is based on the total number of kilometers a vehicle travels.

For Icelandic residents who own a vehicle, the fee is reported and paid according to government regulations.

For visitors, however, the process is much simpler because your rental company handles it for you.

That means you don’t have to register with the Icelandic government or report your mileage yourself. Instead, the rental company collects the fee as part of your rental agreement before paying it to the government.

This is where many travelers become confused because not every rental company chooses to pass that fee on in the same way.

I’ll cover that in detail a little later because understanding this difference can make budgeting your trip much easier.

Experience Tip: One thing I’ve noticed after helping thousands of travelers plan trips to Iceland is that most people assume every rental company calculates this fee exactly the same way. That’s actually not the case, and knowing the difference before you book can save you both money and uncertainty when you’re planning your budget.

Why Did Iceland Introduce the Kilometer Fee?

Moving Away from Fuel Taxes

At first glance, it’s easy to assume that Iceland simply added another fee for travelers. But the reality is a bit more nuanced.

For many years, Iceland paid for a significant portion of its road maintenance through taxes on gasoline and diesel fuel. The idea was simple: the more you drove, the more fuel you purchased, and the more you contributed toward maintaining the country’s roads.

That system worked well when nearly every vehicle relied on fossil fuels. However, Iceland has seen a rapid increase in hybrid and fully electric vehicles over the past several years. Those vehicles still use the roads every day, but they purchase much less, or no, gasoline or diesel.

As a result, the government was collecting less revenue from fuel taxes while road maintenance costs continued to grow. The kilometer fee was introduced to create a funding system that applies more consistently across different types of vehicles, regardless of how they’re powered.

As with any major policy change, it has generated plenty of discussion within Iceland. Some residents feel the reduction in fuel taxes doesn’t fully offset the new kilometer fee, while others see it as a fairer way to fund the country’s road network.

For travelers, though, the most important takeaway is understanding how the fee works and how your rental company chooses to collect it, because that’s what will ultimately affect your budget.

Does the Kilometer Fee Apply to Tourists?

Yes. Whether you’re visiting Iceland for a long Ring Road adventure, spending a week exploring the South Coast, or taking a short getaway around Reykjavík and the Golden Circle, this new fee applies to rental vehicles.

If you’re someone who loves taking scenic detours (and trust me, Iceland will tempt you to do exactly that), knowing how your rental company charges this fee can give you much more peace of mind.

How Rental Car Companies Charge Iceland’s New Road Fee

Some Companies Charge by the Kilometer

This is probably the pricing model most travelers expect. Some rental companies simply pass the government’s kilometer fee directly on to you. When you pick up your vehicle, the current odometer reading is recorded.

When you return it, the rental company calculates how many kilometers you’ve driven and charges the corresponding road fee. The benefit of this approach is that you’re paying for exactly the distance you traveled.

If you only plan to drive around Reykjavík for a couple of days, this could result in a relativ...