I retired but still work, either on contract for my old employer or in a new job. How is my pension taxed?

What does the law say about pension if I keep working?

The answer turns on who you work for. Section 12(2A) of the Income Tax Ordinance, as amended to 30 June 2026 and applying to tax year 2027, has two parts:

• Section 12(2A)(i) charges pension from a former employer at the pension table in the proviso to clause (2) of Division I of Part I of the First Schedule: 0% where the pension does not exceed Rs. 10 million, and 5% of the amount exceeding Rs. 10 million.
• Section 12(2A)(ii) says “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 of Part I to First Schedule as the case may be.”

So a retiree who keeps working for the same organisation, or an associate of it, loses the pension table. A retiree who takes a job with an unrelated employer keeps it.

The idea is not new. The old clause (8) of the Second Schedule, omitted by the Finance Act 2025, also excluded a pensioner who “continues to work for the employer (or an associate of the employer)”.

Which slab table applies under section 12(2A)(ii)?

Clause (2) of Division I 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. For tax year 2027 the clause (2) salary table reads:

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

A retiree whose main income is not salary would fall under clause (1), which has higher rates: 15% of the amount between Rs. 600,000 and Rs. 1,200,000, rising to 45% above Rs. 5,600,000.

How is the new salary taxed?

Section 149(1) requires every person paying salary to deduct tax “from the amount paid at the employee’s average rate of tax computed at the rates specified in Division I of Part I of the First Schedule” on the employee’s estimated salary income for the year. That applies to contract pay from the former employer if it is salary, and to salary from any new employer.

Worked example (illustrative figures)

Both people below receive a pension of Rs. 100,000 a month (Rs. 1,200,000 a year) and a salary of Rs. 150,000 a month (Rs. 1,800,000 a year), are under seventy, and have no other income.

Case A: Mr. Tariq, Faisalabad, rehired on contract by the textile mill that pays his pension. Section 12(2A)(ii) applies. This example assumes the pension and the contract pay are both salary and are added together; section 12(2A)(ii) gives the rates but does not spell out the aggregation.

1. Pension + contract pay: Rs. 1,200,000 + Rs. 1,800,000 = Rs. 3,000,000
2. All of it is salary, so salary exceeds 75% of taxable income and the clause (2) table applies.
3. Rs. 3,000,000 falls in the Rs. 2,200,001 to Rs. 3,200,000 row.
4. Tax: Rs. 116,000 + 20% x (Rs. 3,000,000 - Rs. 2,200,000) = Rs. 116,000 + Rs. 160,000 = Rs. 276,000

Case B: Mrs. Nasreen, Lahore, working for an unrelated school. Section 12(2A)(i) keeps her pension under the pension table.

1. Pension: Rs. 1,200,000 does not exceed Rs. 10 million, so 0% applies. Tax on pension: Rs. 0.
2. New salary: Rs. 1,800,000 under the clause (2) table (this assumes the pension, being charged separately, does not push her salary below the 75% test).
3. Tax: Rs. 6,000 + 11% x (Rs. 1,800,000 - Rs. 1,200,000) = Rs. 6,000 + Rs. 66,000 = Rs. 72,000

Same money, different employer: Rs. 276,000 against Rs. 72,000 in this illustration.

What if the facts are less clear?

What if my contract is a consultancy, not employment? Section 12(2A)(ii) says “continues to work”, not “continues to be employed”. Whether consultancy fees count as salary, and whether a consultancy is “work” for the former employer, are separate questions. The text of section 12(2A) does not answer them.

What if I rejoin after a gap? The word “continues” suggests unbroken work, but the Ordinance does not say whether a return after a break is covered.

What if I am over seventy? Section 12(2A)(i) says a person who has attained seventy “shall not be charged to tax on pension income”. The Ordinance does not say whether that prevails over section 12(2A)(ii) for someone still working for the former employer.

Common mistakes

• Assuming any job ends the pension table. Section 12(2A)(ii) is limited to the former employer “or its associate”. “Associate” is a defined term elsewhere in the Ordinance and is not examined here.
• Assuming a contract avoids the rule. The clause speaks of work, not a particular type of appointment.
• Using the pension table for the new salary. The table applies to pension only; the salary follows section 149 and the slab tables.

What to check in the official text

Read section 12(2A)(i) and (ii) and section 149(1), then clauses (1) and (2) of Division I of Part I of the First Schedule and the pension proviso, all in the Ordinance amended to 30 June 2026. Check the Ordinance’s definition of “associate” if the new employer is linked to the old one.