With the start of the 2024/2025 tax year, comes the long-awaited salary increase for many
taxpayers in South Africa.
The coveted annual salary increase goes a long way to ease the financial burden of inflation and
the rapid escalation of the cost of living. However, after the Government’s Budget Speech on 21
February 2024, which confirmed that the annual income tax brackets would not be adjusted for
inflation, a salary increase could potentially result in a taxpayer taking home less money than the
previous tax year.
The tax brackets, as published annually by the South African Revenue Service (SARS), provide
taxpayers with a guide to determine their annual tax liability towards the fiscus depending on where
their income falls within the table. The tax brackets ensure that South Africa adopts an “earn more,
pay more” approach to income tax.
Generally, the income tax brackets are adjusted annually to account for inflation which ensures that
taxpayers benefit from a consistent rate of tax despite any proportional annual increase to their
salary. However, for the 2024/2025 tax year, the South African Government has elected not to
adjust the tax brackets for the first time since the 2019 tax year. Despite the decision to not raise a
single tax bracket, Finance Minister Enoch Godongwana estimates that SARS will be able to collect
an additional R16.3 billion in the 2024/2025 tax year by “exploiting” inflation and what is known as
fiscal drag or bracket creep.
The term fiscal drag, or bracket creep, refers to the phenomenon where, as salaries increase to
keep up with the rising cost of living, taxpayers get dragged into higher tax brackets which results in
their income tax being paid at a higher percentage if the tax brackets have not been adjusted to
take into account annual inflation.
Accordingly, this decision by the Government, to not adjust the tax brackets to account for annual
inflation, will have unfavourable results for thousands, if not hundreds of thousands, of South
African taxpayers without many of them even being aware before the consequences have taken
effect.
As an illustrative example, a taxpayer who earned a gross salary of R350 000 in the 2023/2024 tax
year would have paid a total of R54 800 in income tax. If that same taxpayer, in the 2024/2025 tax
year, received a salary increase of 6%, in line with annual inflation, they would now be earning a
gross salary of R371 000. However, because the tax brackets have not been adjusted for annual
inflation, the taxpayer would be pushed into a higher tax bracket and move from a tax rate of 26% to
a tax rate of 31%. Accordingly, the taxpayer would pay an amount of R60 282 in income tax
resulting in their net income being reduced by R5 402 for the tax year or by R450 a month.
This consequence will create a difficult reality for the already dwindling number of South African
taxpayers. Tax statistics, as submitted by SARS, indicate that more than 32 000 taxpayers ceased
their South African tax residency between the 2017 and 2021 tax years. From this group,
approximately 2700 taxpayers grossed more than R500 000 and approximately 1100 taxpayers
grossed more than R1 million per tax year. These statistics, as reported by SARS, cause great
concern considering that approximately 90% of all income tax is collected from approximately 3
million South Africans despite the total population exceeding 60 million people.
It is evident that there is a growing resentment among high-income earners in South Africa who are
shouldering a disproportionate income tax burden while receiving very little to no return on their
investment in South Africa. With the newest revisions by the Government, these affluent taxpayers
will almost certainly begin to search for opportunities abroad to accumulate long-term wealth. This,
in turn, will unfortunately result in South Africa continuing to haemorrhage taxpayers from the
already miniscule taxpayer population.
Despite this, personal income tax remains the largest source of tax revenue to the fiscus. Perhaps
the rise in the emigration of wealthy taxpayers will incentivise SARS to prioritise taxpayer
satisfaction. Until then, employers and employees can work together to curb the consequences of
fiscal drag by including suitable non-taxable fringe benefits into employee’s packages to reduce
their taxable income.
Some examples of non-taxable fringe benefits include contributions to a pension/provident fund,
monetary long service awards, provision of meals to employees, and subscription fees to a
professional body if such membership is a condition of employment.
However, before employers and employees embark on any package restructuring, it is advisable to
consult an expert such as a tax practitioner. Professional advice will ensure that any restructuring
does not fall foul of any of the relevant tax legislation which could result in taxpayers incurring
penalties or interest as levied by SARS where the sole or primary purpose of the restructuring,
although legitimate, is for the avoidance of or the reduction of taxes payable to SARS.
