Budget 2026: Government Weighs Income Tax Relief for Salaried Class Over Salary Hikes

ISLAMABAD – In a strategic shift for the upcoming fiscal year, the federal government is considering a proposal to provide relief to the salaried class by slashing income tax rates rather than announcing traditional increases in salaries and pensions.

The move, spearheaded by Finance Minister Muhammad Aurangzeb, aims to boost the “take-home pay” of employees without pushing them into higher tax brackets, which often negates the benefits of a pay raise.

Tax Relief vs. Salary Increments

Sources close to the Finance Ministry suggest that the government intends to reward the salaried class for their massive contribution to the national exchequer. Currently, salaried individuals pay more than double the taxes collected from the real estate sector and significantly more than wholesalers, retailers, and exporters combined.

The proposed strategy includes:

• Lowering Tax Rates: Reducing the percentage of tax deducted from monthly salaries.

• Raising the Taxable Threshold: Increasing the minimum income limit at which tax starts, exempting more low-to-middle-income earners.

• Fiscal Savings: Using the billions of rupees saved by freezing salaries and pensions to fund this tax relief.

The “Take-Home Pay” Logic

An official explained that a salary increase often results in employees crossing into a higher tax bracket, leaving them with very little actual cash in hand. By focusing on tax cuts, both public and private sector employees would see a net increase in their monthly disposable income.

While government salaries have risen by 60% over the last four years, private-sector wages have largely remained stagnant despite record-breaking inflation. This new policy aims to provide equitable relief across both sectors.

IMF Consultations and PSDP Protections

Final decisions on these proposals will be made during high-level talks with the IMF mission, scheduled to begin on May 15.

However, one group is already guaranteed a raise. Employees working on Public Sector Development Programme (PSDP) projects will receive a 20% to 35% salary increase effective July 1, 2026. This group had seen their pay stagnate since 2022 and will remain protected from the general salary freeze.

The Burden of the Salaried Class

In the first nine months of the current fiscal year, the salaried class contributed over Rs425 billion in taxes. In comparison, the real estate sector contributed only about Rs200 billion. The government acknowledges that the salaried class has been the most compliant taxpayer while facing the brunt of the Middle East crisis and domestic inflation.