What Is the Salary Differential?
The salary differential refers to the difference between a government employee’s old basic salary and the new, higher salary rate under an updated salary schedule.
In simple terms, it is the additional amount you receive once your agency implements your salary increase — including any back pay if there was a delay in processing.
For FY 2026, the salary differential comes from the implementation of the Third Tranche Salary Increase of the Updated Salary Schedule under Executive Order (EO) No. 64, s. 2024, which took effect on January 1, 2026.
The guidelines are laid out in National Budget Circular (NBC) No. 601, issued by the Department of Budget and Management (DBM) on January 22, 2026.
DID YOU KNOW
The salary increase under EO 64 will end in 2027. It was implemented in four tranches beginning January 1, 2024.
Legal Basis
EO No. 64, s. 2024 provides an updated Salary Schedule for civilian government personnel to ensure an effective, competitive, and sustainable Compensation and Position Classification System (CPCS) that attracts, retains, and engages high-performing civil servants.
This adjustment is part of a four-tranche salary increase authorized by the President to improve compensation, address inflation, and keep government pay competitive with the private sector.
For national government agencies, the four-tranche schedule runs as follows:
- 1st Tranche: January 1, 2024 (retroactive)
- 2nd Tranche: January 1, 2025
- 3rd Tranche: January 1, 2026 ← current
- 4th Tranche: January 1, 2027
Note: The implementation by the LGU of the First Tranche of the Updated Salary Schedule shall be effective not earlier than August 2. 2024, pursuant to Section 325(g) of RA No. 7160, which states that salary increases or adjustments shall in no case be made retroactive.
As a result, the 3rd Tranche Salary Increase of LGUs will only start in August 2026.
Ref: LBC No. 160 dtd. Aug. 12, 2024
Who Is Covered?
NBC No. 601 applies to all civilian government personnel — whether regular, casual, or contractual; appointive or elective; and full-time or part-time — in the executive, legislative, and judicial branches.
It also applies to civilian personnel in constitutional commissions and constitutional offices, state universities and colleges, and government-owned or controlled corporations (GOCCs) not covered by Republic Act No. 10149 or EO No. 95, s. 2025.
Who Is NOT Covered?
Those excluded from the salary adjustment are the following:
- Military and uniformed personnel (MUPs) because they have their own salary adjustment under EO No. 107, s. 2025 (they do actually have their own set of salary differential based on their base pay increase);
- GOCCs covered by a CPCS established by the Governance Commission for GOCCs and approved by the President (the latest of which is EO No. 95, s. 2025); and
- Individuals engaged without employer-employee relationship such as job order and contract of service workers, and consultants.
This means Job Order (JO) and Contract of Service (COS) workers are excluded, even if they work inside a government office.
DID YOU KNOW:
While JO and COS workers are not covered by salary increase they have their own sets of benefits.
How the Salary Adjustment Works
In plain terms: your new 2026 salary is determined by looking at your salary grade (SG) and step as of December 31, 2025, and finding the matching rate in the new 2026 salary table.
For new hires: The salary of a new hire shall be the rate corresponding to Step 1 of the salary grade allocation of the position in the new Salary Schedule.
For contractual/casual personnel:
The salaries/wages of contractual/casual personnel shall be adjusted to the rates corresponding to Step 1 of the salary grade allocations of their positions.
Illustrative Examples:
An employee with SG-11, Step 1 earning ₱30,024 as of December 31, 2025 (2nd Tranche) will receive an adjusted salary of ₱31,705 effective January 1, 2026 (3rd Tranche).
An employee with SG-18, Step 1 earning a monthly salary of ₱51,304 will see this increase to ₱53,818.
Meanwhile, a long-serving employee with SG-8, Step 8 receiving ₱22,843 as of December 31, 2025 will receive ₱23,883 (SG-8, Step 8) starting January 1, 2026.
The salary differential is simply the gap between the old and new salary.
How Salary Differential and Back Pay work
Using the first example: ₱31,705 (new) − ₱30,024 (old) = ₱1,681/month differential. If your agency delayed processing or implementing the latest salary schedule until February or March 2026, you would also receive back pay covering January 2026 up to the month before the latest salary schedule is already implemented in the payroll.
Is the Salary Differential Taxable?
Yes — the salary differential is taxable compensation income. Here’s why it matters:
The salary differential is treated as part of your regular basic salary, not as a tax-exempt benefit. The first ₱250,000 of annual taxable income is completely tax-free under the TRAIN Law. For many low salary grade employees (usually from SG 1 to 10), this means zero withholding tax.
However, for employees earning above that threshold (usually SG 11 and above), the additional income from the salary differential increases monthly gross compensation, which can push the annualized taxable income into a higher tax bracket.
Taxable income is not the same as gross pay. Before applying the tax table, mandatory contributions must be subtracted: Taxable income = Gross compensation − Authorized Deductions (i.e., Personal Share on GSIS, PhilHealth and Pag-IBIG).
Key Tax Notes:
- The differential is subject to withholding tax at the TRAIN Law rates.
- If your agency releases back pay (retroactive differential from January 2026), it will be subject to annualization — meaning your payroll officer must calculate total tax due for the year and withhold accordingly.
- At year-end or upon separation, the employer performs a tax annualization, comparing the total taxes actually withheld against the total annual tax liability. Any over-withholding results in a refund to the employee; any under-withholding results in additional tax due.
Effect of Salary Increase on Other Benefits
The new basic salary rate also increases the base for computing other benefits tied to basic pay, including but not limited to:
- Mid Year and Year End Bonus — computed based on the new basic salary
- GSIS Retirement Benefits — generally computed using the latest basic salary
- Terminal Leave Benefits — note: for compulsory retirees, retirement benefits including Terminal Leave Benefits shall be computed based on their monthly basic salaries as of the day prior to the effective date of their retirement, in accordance with existing laws, rules, and regulations.
- Monetization of Leave Credits — the monetized leave credits is based on the highest salary received which is the latest salary.
- GSIS, PhilHealth, and Pag-IBIG contributions — these will also increase proportionally since contributions are based on the basic monthly salary
Documents Involved: The NOSA
The key document in this process is the Notice of Salary Adjustment (NOSA). This is the official written notice from your agency head confirming your new salary rate.
The Human Resource Management Officer (HRMO)/Administrative Officer (AO) of a national government agency or GOCC shall prepare Notices of Salary Adjustment (NOSAs) for the incumbent civilian personnel for approval by the Head of Agency.
The NOSA states:
- Your name, position and Plantilla No.
- The legal basis for the salary adjustment
- Your current salary grade and step
- Your old salary rate (as of December 31, 2025)
- Your new salary rate (effective January 1, 2026)
- The amount of the salary differential (also known as salary increase/adjustment)
- A copy of the NOSA is also furnished to the GSIS if the employee is a member.
Accountability and Overpayments
The implementation of salary differential will be subject to the usual accounting and auditing rules. The circular stressed that any overpayment will have to be refunded, noting that the adjustment is subject to review and post-audit, and to appropriate re-adjustment if found not in order.
This means if an agency erroneously applies a higher salary grade or step than what the employee is entitled to, the employee will be required to refund the excess. Agency heads and HR officers are held personally liable for unauthorized payments.
Frequently Asked Questions
Q: When exactly does my new salary take effect?
Effective January 1, 2026 (for National Government Agencies). If your agency has not yet processed it, you are entitled to back pay from January 1, 2026.
Q: I’m a casual employee. Am I entitled to the increase?
Yes, casual employees are covered. Your adjusted salary will be set at Step 1 of your position’s salary grade in the 2026 schedule.
Q: I’m a Job Order worker. Do I get the differential?
No. JO and COS workers are explicitly excluded from NBC No. 601.
Q: Will my GSIS, PhilHealth, and Pag-IBIG contributions go up?
Yes. Since contributions are based on your basic monthly salary, they will increase proportionally with your new pay rate.
Q: Is there a 4th tranche?
Yes. The final tranche takes effect January 1, 2027. The full four-year schedule runs from 2024 to 2027 under EO No. 64.
Question
For questions specific to your agency, coordinate with your Human Resource Management Officer (HRMO) or Administrative Officer. For unresolved cases, you may submit a formal inquiry to the Department of Budget and Management.
