In most countries, specifically developed countries, paying income tax for the first time is a milestone in a citizen’s life. As governments struggle to balance budgets and fund public services, rising income taxes on salaries are becoming a reality for people all around the world.
In Pakistan, we are also facing a rising tax rate as our government struggles to manage a challenging economy and a horrific debt burden. This increase in the tax rate is affecting the salaried class the most as the tax collection from this segment is increased in the FY2024-25 budget.
Details of the New Taxes
The salary exemption limit was unchanged at PKR 50,000 per month for the past three years. However, this year the government has proposed big changes to taxable income above this threshold that will directly impact salaried individuals.
Through the Finance Bill 2024 (or what we know as the Budget 2024), the tax rate for salaried individuals earning between PKR 50,000 and PKR 100,000 per month has been doubled. The proposed increase would see the tax rate go up from 2.5 percent to 5 percent on all income earned above PKR 50,000 in this bracket.
Similarly, people who earn a monthly income between PKR 100,000 and PKR 200,000 will pay 15 percent instead of 12.2 percent on everything above PKR 100,000, along with a fixed sum of PKR 30,000 instead of PKR 15,000 per annum in the past.
Withdrawals of Sales Tax Exemptions
While these changes in income tax rates and slabs will generate additional revenues of PKR 70 billion from the salaried class, the government will raise an additional PKR 200 billion from advance sales tax on retailers and wholesalers. Changes in capital gains tax collection are also likely to boost collection by PKR 50 billion.
Approximately PKR 30 billion in sales tax exemptions had been revoked from the health sector alone and another PKR 47 billion from the poultry sector. The withdrawal of exemptions in these two areas will create another spike of inflation in the coming months as price increases are passed on to consumers.
Understanding the Impact of Rising Income Taxes
This increase in taxes significantly affects the average person’s take-home pay and throws many people’s financial plans into difficulties. Rising taxes are also affecting our overall economic well-being.
Understanding how these changes impact your finances and exploring strategies to mitigate their effects can help you navigate this challenging landscape.
Reduced Disposable Income:
Higher-income taxes directly reduce the amount of money you take home, leaving less for discretionary spending, savings, and investments. This reduction in disposable income can impact your ability to achieve financial goals and maintain your standard of living.
Increased Financial Stress:
With more of your salary going toward taxes, financial stress can increase. This stress can affect your mental and physical health, work performance, and overall quality of life. Coupled with rising inflation, there is double pressure on your income.
Implications for Retirement Savings:
Higher taxes can impact your ability to save for retirement. With less disposable income, you might find it challenging to contribute to retirement accounts, potentially delaying your retirement plans.
Strategies to Mitigate the Impact of Rising Income Taxes
Explore Tax Deductions and Credits:
Itemize Deductions:
Review your expenses to determine if itemizing deductions instead of taking the standard deduction can reduce your taxable income. Common itemized deductions include mortgage interest, property taxes, charitable contributions, and medical expenses.
Take Advantage of Tax Credits:
Research and claim tax credits for which you are eligible. Tax credits directly reduce your tax liability and can significantly impact your overall tax burden. Examples include credits for education expenses, energy-efficient home improvements, and childcare costs.
Adjust Withholding and Estimated Payments:
Make Estimated Tax Payments:
Consider making estimated tax payments if you have additional or supplemental income sources or expect a higher tax liability. This approach can help you manage your tax burden and avoid surprises at tax time.
Consider Professional Financial Advice:
Consult a Tax Professional:
Engage a tax professional or financial advisor to review your tax situation and provide personalized strategies. They can help you identify deductions, credits, and planning opportunities specific to your circumstances.
Plan for Future Tax Changes:
Work with a tax advisor to anticipate and plan for future tax changes. Proactive planning can help you make informed decisions and optimize your financial strategies in light of potential tax increases.
Long-Term Considerations
Invest in Education and Skills:
Investing in education and skills development can increase your earning potential and help offset the impact of rising taxes. Higher-income levels can provide more financial flexibility and resilience against tax increases.
Advocate for Tax Reforms:
Engage in civic activities and advocate for tax policies that align with your financial interests. Participate in discussions about tax reforms and support initiatives that promote fair and equitable taxation.
Conclusion
Rising income taxes on salaries present a significant challenge for many workers, affecting disposable income, financial planning, and overall well-being. By understanding the impact of these changes and implementing strategies to mitigate their effects, you can navigate this challenging landscape more effectively. Maximizing tax-advantaged accounts, exploring deductions and credits, adjusting withholding and estimated payments, and seeking professional advice are essential steps in managing your tax burden and maintaining financial stability.
Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.
