Running payroll in Pakistan

Hiring employees and processing payroll in Pakistan isn’t always a straightforward business. There are several registration steps companies have to undertake before they can start running their local payroll in Pakistan. Working with a local payroll partner can help mitigate compliance risks. 

On the plus side, wages and social security contributions payable by the employer are quite low which makes hiring Pakistani employees an attractive option for international companies. With one of the largest populations on the planet, Pakistan also offers foreign employers a large pool of potential job candidates to choose from.

Unless they are planning to use an Employer of Record solution, foreign companies need to set up a subsidiary before they can hire and process payroll in Pakistan. With regard to payroll, the necessary registration processes include: 

• Obtaining a national tax number

• Registering with the Employees Old-Age Benefits Institution (EOBI) - under certain circumstances, registration with one of the provincial social security authorities may be necessary

• Opening a local bank account

Both employee and employer must contribute to the national pension fund - but contribution rates are fairly low compared to European countries. Income tax is progressive and rates go up to 35%. 

Tax considerations

Pakistan residents are taxed on their worldwide income while non-residents only have to pay tax on certain types of income sourced in Pakistan. Individuals are considered tax residents if they spend more than 183 days in one calendar year living and working in Pakistan. 

The tax system is progressive with 35% being the highest tax rate for employment income - tax bands vary depending on the type of income. Benefits and allowances granted to employees are also subject to tax - with several exceptions. There is no income tax on the first PKR 600,000. Income tax rates and bands are currently (as of January 2022) set as follows: 

Tax withholding and reporting 

Employers are responsible for calculating and withholding income tax from their employees’ salaries on a monthly basis. Employees need to file an annual tax return. The return has to be submitted no later than 30 September. For income exceeding PKR 500,000, the tax return must be filed electronically. The tax year in Pakistan runs from 1 July to 30 June.

Social security contributions

There currently is only one social security fund collecting contributions from employers and employees on the national level which is the Employees Old-Age Benefits Institution (EOBI). Monthly contributions are levied on employers at a rate of 5% and on employees at a rate of 1%. Employers are obligated to submit payments on a monthly basis. There are provincial social security funds to which employers might have to contribute a certain percentage of their employees’ wages.

Employees in Pakistan are entitled to the following benefits:

• Annual leave and public holidays: 14 days of paid annual leave, plus at least 11 public holidays

• Maternity leave: 180 days for the first, 120 days for the second and 90 days for the third child

• Paternity leave: 30 days for each child

• Sick leave: 10 days of fully-paid casual leave, plus 16 days of partially paid sick leave 

For more information on employee benefits and other employment requirements in Pakistan (including severance pay and termination procedures), check out our Global Hiring Guide.

Full-time employees must be paid at least PKR 17,500 per month. It’s not mandatory to pay employees a 13th month salary, but businesses with a certain number of employees must share their profits with their employees. Overtime hours on normal working days must be compensated at a rate of 200% of the employee’s usual wages. 

Payroll can be processed weekly, bi-monthly or monthly, the latter being the most common choice. Payments to employees should be made via bank transfer. Employees must be provided with a payslip at the end of each pay period. The payslip should detail the employee’s earnings, taxes as well as other benefits and deductions.