Why the New Fiscal Year Requires Immediate Action
Pakistan's fiscal year begins on 1 July 2025, which means the Finance Act 2025 tax slabs take effect immediately for all salary payments made from that date. Employers are required under Section 149 of the Income Tax Ordinance 2001 to withhold income tax from employee salaries at the time of payment. Failure to apply the correct slabs from 1 July 2025 will result in under-withholding, creating a year-end liability for employees and potential penalties for the employer.
Payroll teams must update their withholding calculations before the first July payroll run. This guide provides the complete slab table, worked examples for five salary bands, and the Section 149 averaging formula you need to do this correctly.
FBR Income Tax Slabs for Salaried Persons: 2025-26
The following slabs apply to income from salary for tax year 2026 (July 2025 to June 2026) under the Finance Act 2025:
| Annual Taxable Income (PKR) | Tax Rate | Tax on Lower Limit |
|---|---|---|
| Up to 600,000 | 0% | Nil |
| 600,001 to 1,200,000 | 5% on amount exceeding 600,000 | Nil |
| 1,200,001 to 2,200,000 | 15% on amount exceeding 1,200,000 | 30,000 |
| 2,200,001 to 3,200,000 | 25% on amount exceeding 2,200,000 | 180,000 |
| 3,200,001 to 4,100,000 | 30% on amount exceeding 3,200,000 | 430,000 |
| Above 4,100,000 | 35% on amount exceeding 4,100,000 | 700,000 |
Important notes:
- Non-filers (persons not on the Active Taxpayer List) pay higher rates. The surcharge for non-filer salaried employees is typically an additional 100% of the tax calculated above, effectively doubling the withholding obligation.
- High earners above PKR 10 million annual salary may be subject to an additional surcharge under the Finance Act. Employers with such employees should consult their tax advisor.
- These slabs apply to taxable salary income after allowable exemptions and deductions.
How the Slabs Changed vs 2024-25
The 2025-26 slabs maintain the same bracket structure as 2024-25 with marginal adjustments to lower brackets. The zero-tax threshold remains at PKR 600,000 annually (PKR 50,000 per month). The key change from the previous year is that the Finance Act 2025 increased enforcement of non-filer surcharges, making it more critical for employers to verify ATL status for each employee at the start of the fiscal year.
Worked Examples for Five Salary Bands
Example 1: PKR 50,000 per month (Annual PKR 600,000)
| Annual taxable salary | PKR 600,000 |
| Tax on first PKR 600,000 | PKR 0 (zero slab) |
| Annual tax liability | PKR 0 |
| Monthly withholding | PKR 0 |
| Effective tax rate | 0% |
Example 2: PKR 100,000 per month (Annual PKR 1,200,000)
| Annual taxable salary | PKR 1,200,000 |
| Tax on first PKR 600,000 | PKR 0 |
| Tax on next PKR 600,000 at 5% | PKR 30,000 |
| Annual tax liability | PKR 30,000 |
| Monthly withholding | PKR 2,500 |
| Effective tax rate | 2.5% |
Example 3: PKR 200,000 per month (Annual PKR 2,400,000)
| Annual taxable salary | PKR 2,400,000 |
| Tax on first PKR 600,000 | PKR 0 |
| Tax on PKR 600,001 to 1,200,000 at 5% | PKR 30,000 |
| Tax on PKR 1,200,001 to 2,200,000 at 15% | PKR 150,000 |
| Tax on PKR 2,200,001 to 2,400,000 at 25% | PKR 50,000 |
| Annual tax liability | PKR 230,000 |
| Monthly withholding | PKR 19,167 |
| Effective tax rate | 9.58% |
Example 4: PKR 400,000 per month (Annual PKR 4,800,000)
| Annual taxable salary | PKR 4,800,000 |
| Tax up to PKR 4,100,000 (per table) | PKR 700,000 |
| Tax on PKR 4,100,001 to 4,800,000 at 35% | PKR 245,000 |
| Annual tax liability | PKR 945,000 |
| Monthly withholding | PKR 78,750 |
| Effective tax rate | 19.69% |
Example 5: PKR 800,000 per month (Annual PKR 9,600,000)
| Annual taxable salary | PKR 9,600,000 |
| Tax up to PKR 4,100,000 | PKR 700,000 |
| Tax on PKR 4,100,001 to 9,600,000 at 35% | PKR 1,925,000 |
| Annual tax liability | PKR 2,625,000 |
| Monthly withholding | PKR 218,750 |
| Effective tax rate | 27.34% |
How Average Rate of Tax Works Under Section 149
Section 149 requires employers to withhold tax at the average rate for the year, not the marginal rate for each individual payment. This is important because it smooths the withholding across all 12 monthly payments rather than front-loading or back-loading the liability.
The formula is:
- Estimate the employee's total annual taxable salary (multiply current monthly salary by 12, adjusted for any known changes)
- Calculate the total annual tax on that estimated annual income using the slab table
- Divide the annual tax by 12 to get the monthly withholding amount
- If the salary changes during the year, recalculate the annual projection and re-average from the month of change through month 12
This averaging approach means a PKR 200,000-per-month employee always has PKR 19,167 withheld each month regardless of which month it is. Do not apply the marginal rate to each month's payment independently.
Allowances and Exemptions
Several components of the remuneration package can reduce taxable salary:
- Medical allowance: Up to 10% of basic salary is exempt from tax if the employer provides a formal medical allowance. Amounts above 10% are taxable.
- Conveyance allowance: A designated conveyance allowance for official duties is partially exempt. The exemption limit is notified by FBR; amounts above the limit are taxable.
- House rent allowance (HRA): HRA is generally included in taxable income. However, if the employer provides rent-free accommodation, a formula is applied to calculate the taxable value of the benefit.
- Provident fund contributions: Employer contributions to an approved provident fund are exempt up to prescribed limits.
When calculating the annual taxable salary for Section 149 purposes, deduct eligible exemptions before applying the slab table.
Impact of Bonuses on Annual Tax Liability
A performance bonus paid during the year increases the employee's total annual income, which may push them into a higher bracket or increase their tax within the same bracket. The correct approach under Section 149 is:
- In the month the bonus is paid, recalculate the projected annual income by adding the bonus to the remaining expected salary for the year
- Recalculate the total annual tax on the new projected annual income
- Subtract the tax already withheld in prior months
- Divide the remaining tax liability by the remaining months (including the bonus month)
This spreads the additional tax from the bonus across the rest of the year rather than creating a large single-month withholding spike, which helps employee cash flow while keeping the employer compliant.
Filer vs Non-Filer Rates
The Active Taxpayer List (ATL) published by FBR distinguishes filers from non-filers. For salaried employees who are non-filers, withholding tax rates are effectively doubled. Employers must:
- Verify each employee's ATL status using the FBR online portal or IRIS system at the start of the fiscal year
- Re-check ATL status when the annual ATL update is published (typically in March)
- Apply the non-filer surcharge to employees who are not on the ATL
- Document the ATL check date and result in the employee's payroll record
Employees can improve their situation by filing their income tax returns and joining the ATL. Many employers include ATL status and its payroll implications in their employee financial wellness communications.
Automate Section 149 Withholding with Peoplifi
Manually applying the Section 149 averaging formula across a payroll of 50 or more employees, with varying salaries, bonuses, allowances and ATL statuses, is a significant compliance burden. Peoplifi's payroll module handles this automatically:
- Updated with FBR 2025-26 slabs on 1 July 2025
- Section 149 averaging formula applied by default
- Bonus tax recalculation triggered automatically when a bonus component is added
- ATL filer/non-filer flag per employee with bulk import support
- Allowance exemptions (medical, conveyance) configured per employee
- Monthly tax deduction certificate and annual IRIS-compatible export
Use the Peoplifi FBR Tax Calculator to verify withholding for individual cases, or read the detailed FBR Section 149 Tax Guide for 2025-26 for the complete technical breakdown.
Frequently Asked Questions
When do the new 2025-26 tax slabs take effect?
The new slabs take effect from 1 July 2025, the first day of tax year 2026. All salary payments made on or after that date must use the new slabs for Section 149 withholding. Retroactive adjustment is not permitted for salaries already paid before 1 July 2025.
What happens if I under-withhold tax during the year?
If the cumulative amount withheld at year-end is less than the employee's actual annual tax liability, the shortfall must be deducted from the employee's last salary payment of the year. If the employment ends before year-end with an underpayment, the employee remains personally liable for the balance when filing their return, but the employer may face penalties for under-withholding.
Do I need to file a separate return for my employees?
No. Employers are not required to file individual returns on behalf of employees. The employer's obligations are: (1) withhold the correct amount each month, (2) deposit the withheld amount to FBR by the 15th of the following month, and (3) issue an annual tax deduction certificate to each employee. Employees use this certificate when filing their own income tax returns.
How do I handle an employee who joins mid-year?
For a mid-year joiner, project their annual salary from the joining date through 30 June. Calculate the tax on that projected partial-year income using the full slab table, then average it across the remaining months of the fiscal year. If the employee has a salary certificate from a previous employer showing tax already withheld in the same fiscal year, include that amount in the calculation to avoid double withholding.
Are gratuity and provident fund payouts taxable?
Gratuity paid under an approved gratuity scheme is exempt up to prescribed limits notified by FBR. Employer contributions to an approved provident fund are also exempt up to the prescribed limit. Amounts above these limits are included in taxable income. Consult FBR notifications for the current exemption limits as they may be updated annually in the Finance Act.
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