Upvote:5
Practically every adult understands at least some English. I think it would be quite hard to find anyone above age 12 that wouldn't understand the phrase "Do you speak English". To be polite you can start with that. If it is somebody in the tourist industry you can of course just assume they know English, you don't need to ask. You should be able to have a normal conversation with around 98% of people in English. They might have more trouble understanding what you are saying when you speak in Icelandic.
I actually experienced last time I was in Iceland that I needed to speak English to get service at some cafΓ©s in Reykjavik because the staff didn't know any Icelandic!