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Payroll is more than calculating monthly salaries. It also ensures that employees are taxed correctly and that the employer fulfils its withholding obligations under the Income Tax Ordinance, 2001.
Every Finance Act brings changes that require businesses to review their payroll calculations. While many organizations focus only on updating tax rates, a payroll review should go much further.
The Finance Act 2026 has introduced important changes for salaried individuals. The threshold for the highest tax rate of 35% has been increased to an annual taxable income of PKR 7 million. In addition, the 9% surcharge previously applicable to higher-income salaried individuals has been abolished. These changes provide an opportunity for businesses to review their salary structures and payroll processes.
Why should businesses review their payroll?
Payroll is more than calculating monthly salaries. It also ensures that employees are taxed correctly and that the employer fulfils its withholding obligations under the Income Tax Ordinance, 2001.
An outdated payroll structure can result in:
- Incorrect tax deductions from employees' salaries.
- Increased exposure to withholding tax issues.
- Employee dissatisfaction due to avoidable tax deductions.
- Additional work at year-end to correct payroll records.
An outdated payroll structure doesn't just cost money — it costs trust, time, and compliance credibility.
Areas that deserve attention
- Review salary structures. Many organizations have salary structures that have remained unchanged for years. A review can help determine whether the existing structure still reflects the latest tax provisions while remaining fair and compliant.
- Verify allowances and benefits. Allowances, reimbursements and other employment benefits should be reviewed to ensure they are treated correctly under the tax law and supported by proper documentation where required.
- Update payroll calculations. Payroll systems should be updated to reflect the revised tax slabs and the abolition of the 9% surcharge so that monthly tax deductions remain accurate throughout the year.
- Review annual tax projections. Tax should not be calculated only on the current month's salary. Employers should consider annual taxable income, including bonuses, incentives and taxable benefits, to minimize year-end adjustments.
Looking beyond compliance
A payroll review is not only about meeting legal requirements. It is also an opportunity to improve internal processes, reduce payroll errors and provide employees with confidence that their taxes are being calculated correctly.
As businesses begin the new tax year, reviewing payroll in light of the Finance Act 2026 is a practical step towards stronger compliance and better financial management.
Need Help Reviewing Your Payroll Structure?
Muhammad Abbas & Co. Chartered Accountants can review your salary structures, update payroll calculations for the Finance Act 2026, and ensure your withholding obligations are fully met.
Editorial Note
This article is published by Muhammad Abbas & Co. Chartered Accountants for general informational purposes only and does not constitute legal or tax advice. Tax laws and FBR procedures in Pakistan are subject to change. Organizations should seek professional advice based on their specific circumstances. While every effort has been made to ensure accuracy at the time of publication, no liability is assumed for errors, omissions, or any outcomes resulting from the use of this information.