If Enoch Godongwana has his way, your salary increase this year could be more like a pay cut once inflation and higher taxes are factored in.
That’s because the finance minister has once again failed to adjust personal income tax brackets for inflation, a move that stealthily increases the tax burden on workers through “bracket creep”, where inflation-linked pay hikes push earners into higher tax brackets without any real gain in spending power.
“Usually, employees will notice that in March every year, their take-home pay goes up a little because tax is slightly lower than the previous year because of that inflationary adjustment,” says Tanya Tosen, a tax and remuneration specialist at Tax Consulting South Africa. “Now, because we’re not getting that relief, employees are actually going to be in a worse position because it’s going to erode our disposable income.”
This is the second year in a row Godongwana has opted not to adjust for inflation – a move that will raise an extra R19.5bn for the state. The 65-year-old former trade unionist is scrambling to plug a hole in the country’s finances, caused by years of unchecked spending, corruption and inefficiency. Debt has ballooned, and interest payments are now the second-largest line item in the national budget.
Inflation this year is expected to average 4.3%, according to the National Treasury, though the South African Reserve Bank (SARB) has pencilled in a lower 3.6%. Either way, workers will need more than that – closer to 5% or more – to break even once higher taxes are factored in.
Tosen isn’t convinced either Treasury or the SARB will get the inflation numbers right, given the geopolitical risks caused by US President Donald Trump’s inconsistent policies, especially around trade tariffs.
Middle-income workers earning around R30,000 a month, for example, could see their marginal tax rate rise from 26% to 31% if they were just given an increase that matches Treasury’s 4.3% inflation forecast. This right here is bracket creep.
In rand terms, their pay-as-you-earn tax would increase by nearly R4,200 a year.
High-income public sector earners won’t be spared either. Someone earning R2m who gets a 5.5% raise will take home nearly R7,000 less than the initially proposed inflationary adjusted tax table.
Says Tosen: “For organisations that are providing salary increases, it is important to run the numbers, as this is complex at every marginal rate.”
As a guide, she prepared this table for Currency to show what salary increases employers should consider to offset the higher taxes caused by the lack of inflation adjustment. These increases would only keep employees on par with inflation and wouldn’t reward high performers.
The consequences go beyond household budgets. Employers now face growing pressure from staff, who are seeing their cost of living rise, but their net pay shrink.
“We’re seeing a surge in companies looking to restructure their pay models,” Tosen says.
Flexible or customisable remuneration structures with optional benefits are gaining traction as they allow employees to increase their net salaries by adjusting non-cash perks like death or disability cover to suit their personal and financial requirements.
“Companies that don’t offer a level of flexibility in their remuneration structure may find themselves losing talent,” she warns.
Sleight of hand
Consumers will feel the squeeze from another angle, also thanks to Godongwana. In his second attempt to get the budget passed on March 12, he proposed raising VAT by 0.5 percentage points this year and another 0.5 percentage points next year.
While this is better than the two percentage point hike he tried to sneak through in his failed February budget, his first budget proposal did account for inflation in the personal income tax brackets.
And then there’s the issue of medical scheme rebates. “Taxpayers who contribute to medical aid schemes would further have had to stomach the pain of below-inflationary increases of medical scheme fees tax credits,” Bowmans partner Kelly Wright and senior consultant Aneria Bouwer wrote on the firm’s website. “The position is even worse for taxpayers relying on savings, as the interest exemption has not been increased in the past 11 years.”
Medical scheme credits refer to rebates provided to individuals who contribute to registered medical aids to reduce the amount of tax they pay and make private care more affordable. Interest income is earned from savings accounts, bonds or money market funds and the exemption thresholds have remained at R23,800 per year for individuals under 65 and R34,500 per year for individuals 65 and older – despite inflation eroding their real value over time.
In all, the notion that we’ve been spared higher income tax rates is, frustratingly, yet another governmental sleight of hand.
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