If I get pension and a salary from a new job, how is each taxed?

What does the law say?

Both payments fall under the head “Salary”. Section 12(2)(f) includes “any pension or annuity” in salary, and section 12(2)(a) includes pay and wages. What changes is the rate table each one uses.

Pension. Section 12(2A), inserted by the Finance Act, 2025, sets a separate rule for pension. Under section 12(2A)(i) the pension “shall be charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule” where the amount received from a former employer exceeds ten million rupees in a tax year. The same sub-clause says an individual who has attained the age of seventy years “shall not be charged to tax on pension income”.

The proviso table in the First Schedule has two rows:

Pension received from a former employer in a tax year	Rate
Up to Rs. 10,000,000	0% of the amount
Above Rs. 10,000,000	5% of the amount exceeding Rs. 10,000,000

Salary from the new job. Section 12(2A)(ii) sends pension to the ordinary slab rates only where the individual “continues to work for former employer or its associate”. A job with an unrelated employer does not trigger that sub-clause, so the pension stays on the table above. The new salary itself is taxed on the salaried table in clause (2) of Division I, Part I of the First Schedule, which applies where salary is more than 75% of taxable income.

For tax year 2027 (1 July 2026 to 30 June 2027) that table reads:

Taxable income	Tax
Up to Rs. 600,000	0%
Rs. 600,001 to Rs. 1,200,000	1% of the amount over Rs. 600,000
Rs. 1,200,001 to Rs. 2,200,000	Rs. 6,000 + 11% of the amount over Rs. 1,200,000
Rs. 2,200,001 to Rs. 3,200,000	Rs. 116,000 + 20% of the amount over Rs. 2,200,000
Rs. 3,200,001 to Rs. 4,100,000	Rs. 316,000 + 25% of the amount over Rs. 3,200,000
Rs. 4,100,001 to Rs. 5,600,000	Rs. 541,000 + 29% of the amount over Rs. 4,100,000
Rs. 5,600,001 to Rs. 7,000,000	Rs. 976,000 + 32% of the amount over Rs. 5,600,000
Above Rs. 7,000,000	Rs. 1,424,000 + 35% of the amount over Rs. 7,000,000

How is the tax collected on each?

Two different people deduct tax, under two different sub-sections of section 149.

• Your new employer deducts under section 149(1), at your average rate worked out on your estimated salary for the year using the Division I rates.
• Your pension payer deducts under section 149(1A). That sub-section applies only to a former employee below the age of seventy whose pension for the tax year exceeds Rs. 10 million, and only “from the amount which is over and above rupees ten million”.

For most pensioners the pension is well under Rs. 10 million, so the pension payer deducts nothing and the only monthly deduction is from the new salary.

Worked example (illustrative figures)

Tariq Mahmood, 62, retired from a private bank in Lahore. He now works for an unrelated software company. His figures for tax year 2027 are invented; the rates are the real ones cited above.

• Pension from the bank: Rs. 100,000 a month, Rs. 1,200,000 for the year
• Salary from the software company: Rs. 150,000 a month, Rs. 1,800,000 for the year

Pension. Rs. 1,200,000 is below Rs. 10,000,000, so the proviso table gives 0%. Tax on pension: Rs. 0. The bank deducts nothing under section 149(1A).

Salary. Rs. 1,800,000 falls in the Rs. 1,200,001 to Rs. 2,200,000 band.

1. Amount over Rs. 1,200,000: 1,800,000 - 1,200,000 = 600,000
2. 11% of 600,000 = 66,000
3. Tax: 6,000 + 66,000 = Rs. 72,000, or Rs. 6,000 a month if spread evenly

Total tax for the year: Rs. 72,000.

Comparison: if Tariq had gone back to work for the bank. Section 12(2A)(ii) would then tax his pension at the clause (1) or (2) rates. Treating pension and salary together as Rs. 3,000,000 of salary income on the clause (2) table:

1. Amount over Rs. 2,200,000: 3,000,000 - 2,200,000 = 800,000
2. 20% of 800,000 = 160,000
3. Tax: 116,000 + 160,000 = Rs. 276,000

On these figures, choosing an unrelated employer keeps Rs. 204,000 (276,000 minus 72,000) of tax off the year, simply because the pension stays on its own table.

What if …?

My pension is above Rs. 10 million? Only the part above Rs. 10 million is taxed, at 5%. A pension of Rs. 12,000,000 gives 5% of Rs. 2,000,000 = Rs. 100,000, deducted by the pension payer under section 149(1A). The new salary is still taxed separately on clause (2).

I turn seventy during the year? Section 12(2A)(i) removes tax on pension income for an individual who “has attained the age of seventy years”. The text does not say how a birthday part way through a tax year is treated, so this page does not settle that point.

The new employer is a subsidiary or group company of my old employer? Then it may be an “associate”, and section 12(2A)(ii) moves the pension to the slab rates. That situation is covered on the page about working for a former employer.

Common mistakes

• Adding the pension to the salary on the slab table. Section 12(2A)(i) keeps pension from an unrelated former employer on its own table as a final tax.
• Assuming the new employer will ignore pension rules entirely. Section 149(1) only covers the new employer’s own salary; the pension payer’s deduction is a separate duty under section 149(1A).
• Thinking the Rs. 10 million figure is an exemption with a cliff. The proviso table charges 5% only on the amount exceeding Rs. 10 million, not on the whole pension.

What to check in the official text

Read section 12(2)(f) and 12(2A) together, then section 149(1) and (1A). The pension table is the proviso at the end of clause (2) in Division I, Part I of the First Schedule; it is a table, so read it in the official PDF. Section 12(2A) does not itself explain when a new employer counts as the former employer’s “associate”, so check that point if your new employer has any link to the old one. Section 12(2A) also does not say in terms whether a pension below Rs. 10 million is left out of the taxable income used to place your salary in a slab; the example above follows the separate-table reading that the words “final tax” point to.