Payroll in the Faroe Islands

The Faroe Islands is an archipelago comprising 18 islands of volcanic origin. It is universally known that these pieces of land have the status of an autonomous territory, but officially, belong to Denmark. In this article, we will walk you through payrolls in the Faroe Islands.

The Stunning Natural Environment of the Faroe Islands

The Faroe Islands are an archipelago made up of 18 rugged islands, separated by narrow fjords. Despite the islands’ northern latitude location, winters are mild, and summers are cool. Whether you fly between mountains upon arrival or sail between fjords, you will be keenly greeted by spectacular nature, regardless of the season.

While the Faroe Islands may be a very beautiful place shaped by volcanic activity, according to Statista, this self-governing archipelago is ranked among the highest in the world based on GDP per capita. Having a small open economy, The Faroe Islands are mostly dependent on the fields of fisheries, aquaculture, shipping, biotech, marine biology, and other areas of expertise that are related to the ocean.

In 2021, Salary Expert reported that the average salary for jobs in Torshavn, the capital city of Faroe Islands, is about 50.000 EUR per year.

Let’s make a quick introduction to payroll, and then get insights on payrolls in the Faroe Islands.

An Introduction to Payroll

For any business, no matter small, medium, or large, happy employees are key for business growth and development. Payday is an important day in the lives of all your employees. It is essential that employees will be paid on time and accurately.

In order to pay your employees accurately, it is very important to make the right deductions, add the right allowances, and contribute to superannuation if necessary. This is vital not just for your employees, but also for your own taxes and overall financial health. Without the right tools and knowledge, this payroll process can feel complex, difficult, and seemingly impossible.

Don’t worry though. We’re here to help. In order to master your payroll and keep your employees happy, you need to understand how it all works.

What Is an Allowance?

Allowances are any additional amount given to an employee from their employer for work-related expenses. An example of an allowance is when an employer gives petrol money or a petrol allowance to an employee when they use their vehicle for work-related activities.

Allowances can be tricky, some are included in wage, and some are paid to a third party such as school fees or rent. If your allowances are paid to a third party, then they should be sent directly to the third party’s bank accounts.

Some allowances affect taxes and some don’t.

Allowances before tax are included in the employee’s taxable pay. These allowances usually represent some form of additional pay as compensation for working conditions or for a special skill. Taxable allowances are usually included in the gross salary column, on the Tax Certificate. An example of a taxable allowance is a uniform allowance, a first aid allowance, or a leading hand allowance.

Examples of After-Tax allowances are car allowances, overtime meal allowance, and a living away from home allowance.

Payroll Faroe Islands

What Is a Deduction?

On top of allowances, you also have deductions. A deduction is any amount of money taken from your wage for various reasons. Same as allowances, some deductions affect taxes and some do not.

An example of a deduction that would not have a tax is a repayment of a company loan or repayment of company expenses. As in, this deduction has nothing to do with the employee’s wages. Another example would be breakages. For example, if an employee breaks a computer screen, other equipment, or furniture in the office, they may be subject to a breakage deduction.

It’s important to note that few deductions are After Taxes. Deductions After Tax do not affect the employee’s gross or taxable pay, they are simply subtracted from the employee’s net pay.

So, when you’re looking at your wage, here is what you’re seeing. Your wage or amount earned for your work, plus all of the allowances (taxable or not), minus all the deductions (taxable or not).

Now, that you understand the concepts of allowances and deductions, your payroll will make a lot more sense.

In order to really understand how payroll works, you need to fully understand the following things: superannuation, contribution, holiday pay, leave money and work cover.


In addition to allowances and deductions, we also get the employer’s contribution to our superannuation. Superannuation is also known as a retirement fund, employees pay superannuation as a deduction. And this money, although it is paid to an external super fund, is still ours. One way or another we or our survivors get this money back.

Payroll Faroe Islands

A Payroll Solution in the Faroe Islands

It’s challenging to adapt your payroll to deliver on a large scale when you grow your business. To ensure compliance and accurately pay employees on time, it takes a lot of hours and resources. Employee satisfaction is depending on it, so don’t take payroll for granted.

To solve all your HR and payroll needs in the Faroe Islands, we offer you a single solution – Employer of Record. With an Employer of Record, your employees will get paid accurately and on time. For more details contact Swapp Agency.

Payroll Faroe Islands

Wrapping Up

The Faroe Islands is a self-governing archipelago characterized by deep valleys, narrow fjords, and steep cliffs. It is essential for your business in the Faroe Islands that your payroll is running accurately and efficiently.

You’re probably starting to see that payroll is not exactly a simple process. Once everything is accounted for your employees properly, you can walk happily.

We hope we’ve helped you better understand how payroll works. For more information about payroll or accounting in the Faroe Islands, please do not hesitate to contact Swapp Agency.