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Pakistan is a developing country in South Asia with a low per capita income. Pakistani economy ranks 23rd in the world in terms of its GDP. Pakistan's nominal GDP is $376 billion as of FY 2022. The Pakistan Rupee (PKR) is the official currency in Pakistan. Pakistan is quickly becoming one of the most appealing places to establish a business due to its growing GDP and geographical position. On the bright side, the employer's wages and social security contributions are quite low, so payroll in Pakistan is an attractive option for international companies.
Payroll Cycle and Working Hours in Pakistan
The payroll cycle followed in Pakistan can be daily, weekly, bi-monthly, or monthly basis for payroll process in Pakistan. According to the payroll laws in Pakistan, the standard working hours per day should be 8-9 hours, with no more than 48 hours per week. Working hours should not exceed 9-10 hours per day when lunch and prayer time are factored in for payroll in Pakistan.
Social Security Contributions as Payroll Tax in Pakistan
The social security contributions for payroll tax in Pakistan are administered by the Employees' Old-Age Benefits Institution (EOBI), responsible for collecting and managing contributions, as well as paying out benefits to eligible employees under the payroll process in Pakistan. As per payroll laws in Pakistan, employers are required to make social security contributions for all of their employees who earn more than the minimum wage, which is PKR 25,000. The employer contribution (employment cost) is 5% of the minimum wage while the employee contribution (employee cost) is 1% of the minimum wage for payroll in Pakistan.
According to the payroll laws in Pakistan, the social security system for payroll tax in Pakistan consists of several components, which provide various types of benefits to eligible employees:
- Old-age Pension - This benefit is available to employees who are over 60 years and contributed to social security for at least 10 years. It is to be paid every month and is calculated by the employee's years of service and income.
The pension rates based on employee years of service are:- 10 to 19 years: 20% of the average salary for the previous five years of service
- 20 to 29 years: 25% of the average salary for the previous five years of service
- More than 30 years: 30% of the average salary for the previous five years of service
If an insured employee retires five years before the retirement age, he or she is entitled to a reduced old-age pension i.e., the pension will be reduced by half a percent (0.5%) per month or 6% per year.
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Invalidity Pension – Also known as disability pension, the payroll laws in Pakistan grant it to any insured person whose normal earnings have fallen to 2/3 or who suffers an earning loss of at least 67% due to any incapacity. The pension is payable for: -
- A minimum of 15 years of social security contribution.
- At least 5 years of contributions, a minimum of 3 of which must have been in insurable employment.
- Survivors’ Pension – Social security contribution for payroll tax in Pakistan assists the family in case the insured employee is expired. Following the death of an insured employee who served insurable employment for at least three years, the payroll laws in Pakistan provide for this pension.
- Old-age Grant – Under payroll laws in Pakistan, it is given to an insured employee who has reached the superannuation age but does not meet the minimum pension threshold as they do not fulfill the criteria of 15 years of contribution to social security payroll tax in Pakistan. If they have completed at least two years of insurable employment, these employees are entitled to a payment of one month's earnings for each year of their insured employment.
Employer Contribution (Employment Cost) to Payroll Tax in Pakistan (2022)
- Pension Fund: 5%
- Employer contribution: 5%
Employee Contribution (Employee Cost) to Payroll Tax in Pakistan (2022)
- Pension Fund: 1%
- Employer contribution: 1%
Pension fund (Social security contribution to EOBI, Pakistan. It includes a contribution to old-age pensions, survivors’ pensions, Invalidity Pension, Old- age Grants for employees)
The minimum pension in Pakistan is PKR 8 500 per month for payroll in Pakistan. Overall the contribution to the social security for payroll tax in Pakistan for each employee is 6% of the minimum wage. Employers must submit their and their employee's contributions to an EOBI-designated bank by the 15th of each month.
Income Tax in Pakistan
For the payroll process in Pakistan, income tax is levied on individuals and businesses that earn an income within the country. The tax is administered by the Federal Board of Revenue (FBR), which is responsible for collecting and enforcing tax laws for payroll in Pakistan. In Pakistan, the tax year is from 1 July through 30 June.
The Pakistani government has finalized tax slabs for salaried individuals for the fiscal year 2022-23, with a minimum income tax rate of 2.5% for those earning up to PKR 100,000 per month and a maximum of 35% for those earning more than PKR 1 million per month.
The following Income Tax rates will apply as enacted by the Finance Act 2022 that will affect salaried individuals in Pakistan:
