Pakistani media said Khalil Dale had been travelling home with at least two other people when he was set upon by seven or eight men, who blocked his vehicle and then forced their way inside.
Khalil Dale was born in Yemen and was fluent in Arabic and Swahili. He had been based in Pakistan for a year where he was an aid worker for the International Committee of the Red Cross, providing training and equipment to hospitals.
When police found his body, an accompanying note read: 'This is the body of Khalil who we have slaughtered for not paying a ransom amount', the Mail Online reported.
The doctor who first examined him was reported as saying: "A knife was used to sever his head from the body."
Police said the Pakistani Taleban had claimed responsibility for Mr Dale's death.
British Prime Minister David Cameron last night described the killing as a "shocking and merciless act, carried out by people with no respect for human life and the rule of law.
"Khalil Dale has dedicated many years of his life to helping some of the most vulnerable people in the world and my thoughts today are with his friends and family."
A Red Cross spokesman condemned it as a "barbaric act".
Mr Dale had reportedly been planning to travel to Australia to marry his partner Anne.
Friends of Mr Dale last night described him as a lovely person who had devoted his life to caring for those less fortunate.