The February version of the Budget, released on 19 February 2025, proposed a 2% increase in the VAT rate to raise cR58bn. That version also proposed adjustments to personal income tax (PIT) brackets and rebates to reduce pressure on lower-income earners and to provide partial relief for higher income earners; this proposal was not retained in the revised Budget, released on 12 March 2025.
The Budget indicates that cR28bn of additional revenue will be raised in the 2025/6 tax year. Approximately R19.5bn will be sourced from PIT (which accounts for c39.4% of total tax revenue).
Leaving aside a glaring R30bn deficit, what does this mean, in practical terms, for the average taxpayer? How does National Treasury raise additional revenue from PIT without increasing the top marginal tax rate?
By not adjusting the brackets and rebates to account for inflation (for the second year in a row). We call this ‘bracket creep’ or ‘fiscal drag’. The effect is that inflationary salary adjustments effectively push taxpayers into higher tax brackets, reducing their after-tax income.
The PIT burden has been steadily increasing for more than a decade and bracket creep is increasingly common. While it is easy to overlook the impact of fiscal drag when assessing it on a year-on-year basis, it becomes more pronounced when assessing the impact over a 10-year basis.
Example
Assume your gross annual pay on 1 March 2015 was ZAR 200 000. For the 2016 tax year, that means you would have paid ZAR 24 191[1] (an effective rate of 12.1%) in tax. In today’s money, that is approximately ZAR 318 919, and for the 2026 tax year, you would pay ZAR 46 716[2] (an effective rate of 14.65%) in tax (ie you would pay more tax on the ‘same’ salary). Even though you remained in the same tax bracket, your effective tax rate increased from 12.1% to 14.65%.
A taxpayer in the top bracket would have seen their effective rate increase from 35.85% to more than 37%. A person who earned ZAR 1.5 million in the 2016 tax year would have paid ZAR 522 797[3] in tax (an effective rate of 35.85%). If the income is increased by inflation to ZAR 2 391 893 in the 2026 tax year, the tax would increase to ZAR 885 956[4] (an effective rate of 37.04%).
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. The position is even worse for taxpayers relying on savings, as the interest exemption has not been increased in the last 11 years.
Perhaps we should be grateful that Government vetoed a new top tax bracket.[5] As noted on page 39 of Chapter 4 of the 2025 Budget Review: ‘Raising personal income tax rates is likely to be inefficient as taxpayers make adjustments to reduce their tax liabilities. Higher personal income tax rates would also reduce the incentive to work and save, with potentially larger negative impacts on the economy. Over the past decade, several tax policy measures have been implemented to raise personal income taxes. Although these have increased the tax burden on individuals, they have generated less revenue than expected. Most recently, the 2024 Budget did not adjust personal income tax brackets or medical tax credits for inflation. South Africa’s personal income tax collection measured as a contribution to GDP, and the top tax rate, are far higher than those of most developing countries.’
While taxpayers were spared increased personal tax rates, it is clear from the above examples that fiscal drag does in fact result in individuals being subject to higher income tax rates.
[1] 18% on the amount up to ZAR 181 900 (R32 742) + 26% on the amount above ZAR 181 901 (R4 706) – ZAR 13 257 (primary rebate).
[2] 18% on the amount up to ZAR 237 100 (R42 678) + 26% of on the amount above ZAR 237 100 (ZAR 21 273) –
ZAR R17 235 (primary rebate).
[3] R208 857 + 41% on the amount exceeding R701 300 – R13 257 (primary rebate).
[4] R644 489 + 45% on the amount exceeding R1 817 000 – R17,235 (primary rebate).
[5] The top marginal tax rate increased from 40% to 41% in the 2016 tax year and again to 45% in the 2018 tax year.
