Iceland

For the Northern Lights, winter is the only option.

You can do this on a tour from Reykjavik. There are many providers that offer many different tours, from private to small group to big bus, from day trips to multi-day excursions with various activities.

Here are some examples, but just do an Internet search for "Iceland Northern Lights tours" and you can find what you're looking for.

https://guidetoiceland.is/book-trips-holiday/nature-tours/northern-lights

https://www.re.is/northern-lights-tours/

You could always check out group tours like this: https://www.mtsobek.com/trips/europe/iceland/iceland-winter-wonders-hiking/ I've been on 2 MT Sobek trips and they're always top notch. I imagine that other companies have similar trips, but can only vouch for Sobek. You might want to call and find out when the Northern Lights are at their peak.

For the northern lights, Iceland is not the ideal location, but the winter is as mentioned the only option. For hiking, winter is not the ideal location as the weather can be a bit harsh.

Where would the best location be to see the northern lights? And when?

We have had good ;luck with seeing the aurora in Iceland on several of our trips there. It is not just winter when you can see them though. From September until about the end of March or April, are when you typically see them. Two of our October trips have had amazing showings! October is also my favorite time of year there as you can still do some hiking.

As for tours, we self drive, but have done a few because of the nature of them. On our first trip back in 2015, we did a Golden Circle tour with Reykjavik Excursions, but they use big buses so if I were to do a tour there now, I would opt for a small group one. I would do that for any tour I would do, regardless. We have used Troll for both the Katla Ice cave as well as the Solheimajokull glacier hike. If you do their 2 day tour, they combine those. You can either rent a car or not, it is up to you and what you are comfortable with and depending on time of year, etc.

How much time do you have? That would make all the difference in making suggestions and about renting a car. Summer is nice as you have so much daylight, but fall is beautiful and you can often times see the aurora, and then winter is beautiful as well, in a whole different way. I have not been in the spring, so can't personally speak to that. I head back again this week and cannot get there soon enough;)

There really is no best place, but I posted this thread for questions like that: https://community.ricksteves.com/travel-forum/general-europe/how-to-see-the-northern-lights-a-short-guide