Budget May Ease Income Tax Burden, Skip Salary and Pension Raises

The federal government is considering lowering income tax rates for salaried workers in the upcoming federal budget 2026-27, without increasing salaries or pensions for public sector employees.

Finance Minister Muhammad Aurangzeb has indicated his intention to reduce tax rates and potentially raise the taxable income threshold for the salaried class across Pakistan.

The move follows data showing the salaried class paid more than Rs425 billion in taxes during the first three quarters of the current fiscal year alone.

That figure is more than double the real estate sector’s contribution of approximately Rs200 billion over the same period, according to figures shared by government sources.

Officials say freezing salaries will generate fiscal savings that the government intends to redirect toward providing direct income tax relief for salaried employees.

One official stated that raising salaries could push employees into higher tax brackets, leaving them with little or no real increase in their monthly take-home pay.

He added that with lower tax rates and higher taxable thresholds, government employees would still remain net financial beneficiaries even without any formal salary increase.

Government salaries have risen by more than sixty percent over the past four years, while private sector wages have largely stagnated amid sustained high inflation.

The tax policy office and independent consultancy firms are currently preparing multiple proposals to be presented during IMF budget consultations beginning on May 15, 2025.

The development programme may also face further reductions to a minimal skeleton allocation, though final decisions will only be confirmed following the IMF consultation process.

Last year, increases in salaries and pensions cost the federal government more than Rs170 billion, with provincial governments bearing a burden more than double that amount.

Officials noted that even redirecting part of those savings could meaningfully reduce the personal income tax burden currently placed on salaried employees across the country.

Salary increases already approved for employees working on Public Sector Development Programme projects will remain in place and will not be affected by the new policy.

The government approved a 20 to 25 percent increase in minimum salaries for PSDP project employees last month, effective from the first of July 2026.

These employees had not received any salary revision since April 2022, meaning they went four consecutive years without any formal adjustment to their pay packages.

During that same period, all other government employees including those in the finance ministry received cumulative salary increases of more than 60 percent in total.

PSDP project employees had previously faced cuts of up to twenty-eight percent in annual increments and fourteen percent in maximum salaries under a finance ministry memorandum.

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