Rising Taxes and Persistent Inflation Erode Real Income, Government Considers Tax Relief in Upcoming Budget
Key Takeaways:
1. Pakistan’s salaried middle class has seen its real purchasing power drop by nearly 50% in four years due to inflation and steep tax hikes.
2. The government is considering tax relief measures in the 2025-26 budget, which could benefit millions of salaried individuals.
3. Despite salary increases, high inflation and increased taxation have left many workers with less disposable income, highlighting the urgent need for fiscal reforms.
Islamabad, Pakistan – Pakistan’s salaried middle class is grappling with an unprecedented decline in real wealth, as inflation and surging taxes have nearly halved their purchasing power over the past four years. Despite nominal salary increases, the combined impact of soaring living costs and heavy taxation has left many workers with significantly less disposable income.
According to recent data, gross salaries in Pakistan rose by 56% from 2022 to 2025. However, income taxes surged by approximately 165% during the same period, effectively nullifying any real gains. Inflation peaked at a staggering 29.7% in 2024, and while it has eased to 4.1% in 2025, the prices of essential goods remain stubbornly high.
For instance, a 15% salary hike in 2024 was entirely offset by inflation, resulting in a loss of Rs. 1.38 million in annual take-home pay for an individual earning Rs. 3.16 million. This year, income tax on salaries has already increased by 44.19%, compared to a 17% rise just three years ago.
The government is now considering tax relief measures in the 2025-26 budget to alleviate the burden on salaried individuals earning between Rs. 1.2 million and Rs. 7.8 million annually. Proposed reductions could save taxpayers between Rs. 25,000 and Rs. 190,000 per year, depending on their income bracket. For example, someone earning Rs. 3.6 million could benefit from an Rs. 85,000 tax cut, while those making Rs. 6 million may see savings of up to Rs. 160,000.
Currently, those earning up to Rs. 600,000 per year remain exempt from income tax, with discussions underway to possibly extend this exemption to those earning up to Rs. 1 million annually.
The salaried class has already contributed over Rs. 450 billion in income tax during the first ten months of the current fiscal year, with projections indicating this figure could reach Rs. 550 billion by June 2025. Middle-income earners, with monthly salaries between Rs. 200,000 and Rs. 300,000, are facing effective tax rates of 40-45%, while higher earners are subject to an additional 10% surcharge on top of a 40% rate.
As the government prepares its next budget, the salaried class is hoping for meaningful relief to help restore their eroded purchasing power and stabilize their financial outlook.
