I retired but now work on contract for the same company. Is my pension taxed?

What does the law say?

Section 12(2A) of the Income Tax Ordinance, 2001, inserted by the Finance Act 2025, gives pension two different treatments.

• Clause (i): pension from a former employer is charged as a final tax at the rates in the pension table (the proviso to clause (2) of Division I of Part I of the First Schedule): 0% up to ten million rupees in a tax year, 5% of the amount above that.
• Clause (ii): “the pension of an individual who continues to work for former employer or its associate shall be charged to tax at the rates specified under clause (1) or (2) of Division I”.

So if you are drawing a pension and still working for the organisation that pays it, or for an associate of that organisation, the pension leaves the pension table and joins the ordinary salaried or non-salaried slabs.

This is not a new idea. The omitted clause (8) of Part I of the Second Schedule, as quoted in the footnotes of the consolidated text, exempted pension from a former employer “other than where the person continues to work for the employer (or an associate of the employer)”. Section 12(2A)(ii) keeps that exclusion.

Section 12(5)(b) also matters here. It treats an amount as received from employment whether it is paid by the employee’s employer or “by a past employer”. A pension paid by the company you used to work for is therefore still salary, even though the job it relates to has ended.

Which slab table applies?

Division I has two tables. Clause (2) applies “where the income of an individual chargeable under the head ‘salary’ exceeds seventy-five per cent of his taxable income”. Clause (1) covers other individuals. Both pension and a salary from re-employment are salary, so for most re-hired pensioners clause (2) applies. For tax year 2027 (1 July 2026 to 30 June 2027) the clause (2) table is:

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

If salary is 75% or less of taxable income, for instance because of large rental or business income, the clause (1) table applies instead, with rates rising from 15% to 45%.

How is the tax collected?

Section 149(1) requires the person paying salary to deduct tax at the employee’s average rate, computed at the Division I rates on the employee’s estimated income chargeable under the head “Salary” for the year. The special pension deduction rule in section 149(1A) does not fit this case, because it is built around the pension table and the ten million rupee threshold. The Ordinance does not spell out how two payers (a pension fund and the employer’s payroll) are to share the deduction when the pension comes from a separate fund.

Worked example (illustrative figures)

Dr. Farah retired from a private hospital in Lahore. She receives a pension of Rs. 150,000 a month from the hospital and has been re-engaged by the same hospital at Rs. 200,000 a month. She has no other income and is below seventy.

1. Pension for tax year 2027: Rs. 150,000 x 12 = Rs. 1,800,000.
2. Salary: Rs. 200,000 x 12 = Rs. 2,400,000.
3. Total salary income: Rs. 1,800,000 + Rs. 2,400,000 = Rs. 4,200,000. All of it is salary, so clause (2) applies.
4. Tax: Rs. 541,000 + 29% x (Rs. 4,200,000 - Rs. 4,100,000) = Rs. 541,000 + Rs. 29,000 = Rs. 570,000.

Had Farah taken her new job at an unrelated hospital, section 12(2A)(ii) would not apply. Her pension of Rs. 1,800,000 would fall under the pension table at 0%, and only the new salary would be taxed at the slab rates.

What if I am over seventy and still working there?

Section 12(2A)(i) says an individual who has attained seventy is not charged on pension income, while clause (ii) sends the pension of someone still working for the former employer to slab rates. The text does not say which clause prevails when both describe the same person. This page does not settle that point.

Common mistakes

• Assuming the pension table applies to every pension. Clause (ii) removes it for anyone still working for the former employer or its associate.
• Ignoring associates. Re-employment by a group company can count; “associate” is a defined term in the Ordinance, and the exclusion covers the former employer “or its associate”.
• Taxing the salary alone at slab rates. Clause (ii) puts the pension itself on slab rates too, which pushes the combined amount into a higher band.

What to check in the official text

Read section 12(2A) and 12(5), section 149(1), and clauses (1) and (2) of Division I of Part I of the First Schedule in the official PDF, since our site copy does not reproduce rate tables. If you work under a consultancy or contract rather than as an employee, check how the arrangement is described, because section 12(2A)(ii) does not define “continues to work”.