Paper mill sludge (PMS) is an abundant organic solid waste with complex composition from the pulp and paper industry. In this study, the Fe2O3 was used as a catalyst during PMS pyrolysis to reduce the emission of nitrogen-containing pollutants and tar formation. The transformation of N, N retention rate, and resulting biochar products were comprehensively investigated. The results showed that the char-N content was as high as 58.36% with Fe2O3 addition at 550 °C. The N-species in raw PMS were mainly in the form of protein-N (1.3%), pyrrole-N (73.7%), and inorganic-N (24.9%). However, they were dominated by pyrrole-N (75.7%) and quaternary-N (24.3%). The tar products containing N were only detected as 1,3-propanediamine. The pore diameter of the char increased with the addition of Fe2O3, with the maximum pore size greater than 100 nm at 4–6%, nearly 1000 nm at 8%, and greater than 1000 nm at 10%. The high-resolution transmission electron microscopy (HRTEM) and X-ray diffraction (XRD) analysis of the biochar revealed that the iron was in the form of Fe3O4. It indicated that adding Fe2O3 promotes the nitrogen in a more stable form in char and it was reduced to Fe3O4. In addition, the tar content decreased and the proportion of flammable gas increased. This study is expected to provide a feasible method for the volume reduction of PMS and the preparation of nitrogen-containing porous biochar.