Payroll In Pakistan

Pakistan is among the most attractive destinations to set up a company considering its developing GDP, which is expected to grow by 2% in 2023.

Pakistan is the fifth most populous nation globally, with over 230 million of population. Thus, it is one of the key players in terms of manufactured goods and workforce. Notwithstanding political issues in the last few years, Pakistan remains a favorable country for foreign investment. The three primary reasons for this are the large population, low wages, and low living costs.

Companies can benefit from Pakistan’s low labor cost and growing GDP to smoothly set up their businesses in the country. The knowledge of the payroll process and its other related aspects help companies to hire and retain a talented workforce. 

You require an in-depth understanding of payroll tax in Pakistan and labor requirements to ensure precise and compliant payroll. The below guide describes all aspects you must know about payroll in Pakistan.

How Is Payroll Calculated in Pakistan?

Payroll refers to an employer’s compensation for their services for a fixed period. Usually, the accounting or the HR department handles it.

The payroll calculation process includes calculating pay, disbursing payments, and tracking the employees’ working hours. Maintaining record-keeping is vital for payroll calculation. Moreover, it is imperative to reserve social security contributions and other deductions according to payroll rules and regulations in Pakistan. The following section describes some of these contributions.

Tax at source:

All employers must calculate the Pakistan employer payroll tax, including tax at source. Pakistan follows an income tax scale. Specifically, salaried employees owe tax in the range of 5 to 35%, whereas employees earning less than PKR 600,000 are exempted from any taxes. 

Social security contributions:

Payroll calculation in Pakistan includes the following contributions.                   

Pension rights

Social security laws in Pakistan involve both full and partial pensions. 

• Employees aged 60 years or above with a minimum of 15 years of employment are eligible for the benefits of a full pension. The employees aged 55-59 years (male employees) or 50-54 years (female employees) with a minimum of 15 years of employment are eligible for the benefits of a partial pension. 
• Old-age pension’s rate is calculated as follows:

1. 1. Old-age pension’s rate = 2% of the insured employee’s average monthly pay (in the past 12 months) * years of contributions provided (according to Section 22 of the Employees’ Old Age Benefits Act, 1976).

Dependents’ / Survivors’ Benefit

• Social Security laws in Pakistan also involve the survivor benefit, including dependents like widows, widowers, and children. Those who have been pensioners at the time of their death are eligible to receive survivor’s benefits.  
• The 100% deceased minimum pension is equally distributed among the deceased’s spouses (according to Section 22-B of the Employees’ Old Age Benefits Act, 1976).

Invalidity benefit

• Invalidity benefit is applicable in the case of non-occupational injury/accident/disease leading to permanent invalidity. 
• Suppose employees suffered a 67% loss in their earning capacity. In that case, they are paid 2% of the average monthly earnings in the past 12 months multiplied by the employment years (according to Section 23 of the Employees’ Old Age Benefits Act, 1976).

Important Elements of Salary Structure in Pakistan

The elements discussed below contribute to the salary structure in Pakistan:

Cost to Company (CTC)

A company incurs the CTC, which denotes an annual amount while hiring an employee. It covers the employee’s gross remuneration, net remuneration, additional benefits, payroll deductions in Pakistan, etc.

Gross salary

It covers all those components that contribute to the employee’s compensation package. It covers the total income before calculating any payroll deductions in Pakistan. Specifically, it covers social security contributions, health insurance, etc.

Net salary

It represents the amount residual after calculating all deductions from the gross salary. The amount is credited to the employees’ bank accounts.

Basic salary

It is the amount employees get after employers have calculated all additions and deductions from the annual package. This element depends on two factors i.e., the employer’s job role in the company and the sector’s activities.

Allowances

It covers the job-related expenses employers pay to ensure a better work-life balance for their employees. 

How to Set Up a Payroll in Pakistan?

An overseas business willing to set up payroll in Pakistan can follow the below steps:

• Step 1: Register a business as a locally-owned or foreign-owned company.
• Step 2: Obtain a company registration PIN from the Securities and Exchange Commission.
• Step 3: Register the company name, national tax number, and labor and tax registration.
• Step 4: Companies must open a Pakistani bank account to release payments related to payroll.
• Step 5: In this step, companies must calculate the employee payroll amount. 
• Step 6: Finalize the payroll structure and payroll cycle for your company. 

A Step-by-step Process of Payroll Processing in Pakistan

The processing of payroll in Pakistan includes three stages, which are discussed below.                                                          

1. Pre-payroll stage

• You must establish a business profile, an office, file payroll taxes, and a corporate account. 
• Design a system to guarantee that the company operates smoothly. For that, you must design company policies covering all aspects, from employees’ attendance to the code of conduct. These comprehensive company policies will help employees easily fit into the company culture. 
• Subsequently, you need to set up a working payment structure to ascertain that employees get their salaries when due. 

2. Payroll stage

• It involves the calculation and release of the payment due. 
• You must calculate each employee’s work hours, gross earnings, and the necessary deductions. Pay the net sum to the employee via your preferred payment methods.

3. Post-payroll stage

• This stage involves balancing the record books and sending deductions to the government after disbursing salaries 
• To avoid legal liabilities, maintain a record of the payment history and transactions to easily track transfers. 
• Typically, the payroll process completes after paying your corporate taxes and paying salary deductions.

Payroll Contributions

Based on the salary, both the employer and employees should contribute to social security in Pakistan as part of the Pakistan payroll requirements.

Employers Contribution

Employer payroll contribution is a 5% pension of the salary.

Employees Contribution

Employee payroll contributions include a 1% Pension and a 40-rupee flat rate each month for healthcare insurance.

Payroll Cycle

In Pakistan, employees are paid once a month. The frequency of payroll can be daily, weekly, bi-monthly or monthly.

Pakistan Payroll Options for Companies

Employers can choose various options to process payroll in Pakistan depending on their requirements and budget. The HR payroll Pakistan options are discussed below.

• Internal payroll: Larger companies with long-term commitments to Pakistan can operate their internal payroll. But this option proves to be costlier since the company has to dedicate time and hire a talented workforce who can set up payroll. 

• Remote payroll: The payroll process in Pakistan can be simplified by using remote payroll with your parent company. It will pay the employees at your subsidiary. Although it is a cost-effective option, the company must know different labor laws in Pakistan.

•  A Pakistan payroll processing company: This option involves using the service of a reliable payroll processing company familiar with setting up payroll and the payroll rules and regulations in Pakistan.

• Pakistan payroll outsourcing: Companies can collaborate with a global PEO service provider like Multiplier, which is dedicated to complying with Pakistan payroll requirements. The payroll outsourcing option in this Pakistan payroll guide presents a simple, cost-efficient, and flexible approach to managing payroll in Pakistan.  

Entitlement and Termination Terms

Entitlement terms in Pakistan

Entitlement terms are one of the critical Pakistan payroll requirements found in the employment contract or the collective agreement. An employee is entitled to the following benefits in Pakistan.

Sick leave

• The percentage of sickness benefits depends on the severity of the sickness, their contribution to health insurance, and the location.
• Employees should prove their health status and reason for sick leave by presenting a medical certificate.
• Sick employees obtain sickness benefits from 50% to 75% of their salary for 121 days per year. 
• Employees who suffer from a chronic ailment (tuberculosis or cancer) obtain sickness benefits from 50% to 100% of their salary for one year.  

Maternity leave

• Female employees in Pakistan are entitled to maternity leave of 12 weeks before and after the delivery. 
• They must have served for at least four months in the company to get this benefit.

Casual leave

• According to the 1934 Factories Act, employees are entitled to 10 days of casual leave with 100% of their standard wages. 

Pilgrimage leave

• Employees can obtain pilgrimage leave for up to 60 days. The Collective Bargaining Agent supports the employees willing to go on trips from Hajj to Ziarat.

Annual leave

• The employees in Pakistan are entitled to 14 days of annual leave. They can request annual leave without presenting evidence to support the reason for the request.

Public holidays

• All employees benefit from public holidays in Pakistan, regardless of the sector and industry they are working in. 
• The employees in Pakistan have 15 public holidays per year. These holidays are listed below:

Note: Employees may work during public holidays based on their employment agreement. They obtain an extra day off if they work on public holidays.

Compensation for a work-related injury

Occasionally, workplace accidents are unavoidable. As per Pakistan labor laws, the employer bears the expense in such cases. In the worst workplace injuries (death or permanent injuries to employees), the employer compensates the victim’s family. This amount is different across different regions of Pakistan. The following table shows the amount of compensation for a work-related injury in three regions of Pakistan.

Termination Terms in Pakistan:

Employers can terminate their employees’ employment contracts for valid reasons. Some of these reasons are mentioned below.

• Wilful noncompliance to any legal and reasonable order of a superior authority
• Fraud, theft, or dishonesty in context to the employer’s property or business
• Wilful damage to or loss of employer’s property or goods
• Recurrent repetition of noncompliance with the company’s rules, indecent behavior, false declarations, non-attendance, or inefficient working

According to the Standing Orders Ordinance provision, employees are eligible for a “severance pay or gratuity” if their employment is terminated for any reason excluding misconduct. The severance pay or gratuity equals 30 days’ remuneration for each year served in the employment or any part exceeding six months. For example, four years and eight months are considered five years.

Pakistan Payroll Processing Company

Pakistan’s payroll rules vary as each of its cantons usually functions by following its own rules. You can obtain the maximum benefits of payroll rules and regulations in Pakistan by partnering with an international PEO company like Multiplier.

Setting up payroll in Pakistan can take a lot of time for foreign investors. Businesses must consider compliance with Pakistan Labor and local employment laws before setting up payroll. You can partner with a global PEO company to maximize the benefits of Pakistan’s payroll policies and procedures.

How Can Multiplier Help with Global Payroll?

Pakistan’s payroll management looks after various aspects like payroll processing, payroll cycle, contributions, entitlement and termination terms, and more. The overall payroll process can be tedious and complex for businesses to handle independently. 

You can avoid these hassles and implement the Pakistan payroll process by using the service from a global PEO platform like Multiplier.

Multiplier is well-known for offering EOR solutions to global corporations in 150+ nations. Our proficient experts efficiently deal with payroll processing, payroll management, payroll contributions, employee onboarding, and other relevant tasks. Furthermore, our SaaS-based EOR services ascertain that payroll processing takes place efficiently in the country.