Back in the First Division, Heiðar was part of a Watford team that was undefeated for the first 15 games of the season, topping the league. However, when the team's form slumped in late 2000, Heiðar suffered a crisis of confidence – one of several during his first few years at Watford – and was well below his best for a large amount of that campaign. At the end of the season Taylor retired and was replaced by Gianluca Vialli, who used Heiðar as a wing back.