Budget 2025: South Africa’s Tax Blues

VAT, VAT, is it just about the VAT?  

The SA Budget Speech 2025 debacle will be remembered for a long time to come. The most contentious issue, and the one which attracted most attention, was the proposed VAT increase. 

This was understandable, as VAT affects almost everyone in the country, as well as affecting the least-resourced in society disproportionately (even though there were some proposals to expand the VAT zero-rating of essential food items such as canned vegetables and certain meats). 

But – VAT’s not all…  

Bracket-creep has a greater effect.  

Arguably, too little attention was given to the Minister’s decision to leave the Personal Income Tax brackets, rebates and medical tax credits unchanged, rather than increasing them to take into account the effects of inflationary increases on taxpayers’ income.  

A VAT increase of 0.50%, even with the proposed expanded zero-rating taken into account, would have raised approximately R11.5 billion in the 2025/26 financial year. By comparison, the “fiscal drag” on income tax, resulting from taxpayers being propelled into a higher tax bracket when they receive an inflationary pay increase, will result in additional revenue for the Fiscus of approximately R18 billion. 

And it’s not the first time… 

The effect of fiscal drag becomes even more pronounced when its cumulative effect is taken into account. The Income Tax table for the February 2025/26 year remains identical to that of the February 2023/24 year because this is the second consecutive year that the Finance Minister has applied this tactic, probably because it raises extra revenue while flying under the general public’s radar to some extent. 

Cumulative effect of fiscal drag. 

A simple example illustrates the cumulative impact: 

A salaried employee, under 65 and with no other taxable income or deductible expenses, would have paid income tax (after the standard rebate) of R100,272 on an annual income of R500,000 in the tax year ending 29 February 2024. 

If we assume that the employee receives inflationary increases of 5% p.a. then income tax of R118,082 would be due on a gross income of R551,250 for the February 2025/26 tax year. The employee’s average income tax rate has thus increased from 20.1% to 21.4% of taxable income, and in Present Value terms their annual after-tax take-home pay has decreased by almost R7,000 in February 2024 monetary value terms. 

The taxpayer’s purchasing power is therefore being reduced in real terms, year on year. 

Higher earnings, greater impact: Due to interest and CGT tables

The impact on a taxpayer with higher earnings would be more pronounced, especially when you factor in tax credits for medical expenses, interest income exemptions and capital gains exemptions.  

The interest income exemptions (R23,800 for taxpayers under the age of 65 and R34,500 for age 65 and above) have not increased since the 2014/15 tax year. The annual capital gain exemption of R40,000 has not been increased since the 2012/13 tax year, when Pravin Gordhan was still our Finance Minister! 

Another way that taxpayers are being disadvantaged:  

The Single Discretionary Allowance limit of R1 million annually, which allows South Africans to easily externalise funds into hard currency has also not been increased for many years now. 

As the rand has depreciated significantly against hard currencies in the same time period, it has become impossible to externalise the equivalent amount of hard currency over time.  

Why is the government pursuing such a course? 

The increases in direct and indirect taxation are symptomatic of a government under financial pressure. Unless the South African economy grows materially or tax collection efficiencies are improved, we must unfortunately be prepared for further stealth taxes.  

It may even be possible that new taxes are introduced in future: National Treasury did allude to the possibility of taxing foreign pensions (currently exempt since 2001 when we moved to a worldwide basis of taxation for residents). 

What’s the appropriate response? 

Our challenging tax landscape makes long-term tax planning imperative if you want to preserve financial value. Finding an appropriate balance between the different investment vehicles as well as allocating funds and income streams within families (including trust structures, if applicable) requires careful thought. At the same time, flexibility is crucial because of the uncertainty around possible future changes in the relative taxation of income versus capital growth, and relative tax rates between the different investment vehicles. 

As a result, it’s sensible to consider building a diversified portfolio in terms of tax, in much the same manner that one creates a diversified investment portfolio to provide protection against unexpected changes in different asset prices, relative to each other. 

By Richard Sparg, CFP® CA(SA)