South Africans hit hard by ‘new’ Budget

South Africans may find themselves taking home less money at the end of every month even if they received a salary increase in 2025 as ‘bracket creep’ results in them paying more tax without formal hikes. 

This is feedback from Carla Rossouw, the head of tax at Allan Gray, who explained the hidden tax hike in the government’s 2025 Budget. 

For the second year in a row, the Treasury has left personal income tax brackets and rebates unchanged – effectively handing South Africans a stealth tax in this year’s budget, Roussow said. 

It will be felt in the take-home pay of salaried workers, particularly those in the lower to middle-income bracket.

The decision to leave personal income tax brackets and rebates the same in the 2025/26 tax year is a blow to taxpayers, squeezing South Africa’s narrow tax base further.

“This lack of adjustment fuels bracket creep, also known as fiscal drag – a phenomenon where inflation-driven salary increases push earners into higher tax brackets, effectively raising their tax burden without an official rate hike,” she explained. 

In the previous budget, which leaked in February and was hotly contested, ultimately resulting in the postponement of the budget speech, the Treasury had proposed partial relief by adjusting lower tax brackets and rebates in line with inflation. 

“This was intended to offset the impact of the two-percentage-point VAT hike. However, in the ‘new’ 2025/26 Budget, no such relief has been offered, meaning lower and middle-income earners will bear a heavier tax load.” 

This will be coupled with a 0.5-percentage-point VAT increase over two years, which was proposed by Finance Minister Enoch Godongwana.

As a result, VAT will rise to 16% by April next year. This was approved by a small majority after a contentious National Assembly vote on 2 April 2025. 

Apart from the tax implications, this is likely to result in the end of South Africa’s Government of National Unity (GNU). 

How you can be impacted

Roussow explained that bracket creep will erode the purchasing power of many South Africans, even those who received a salary increase for 2025. 

Without inflationary adjustments, taxpayers may find themselves earning more but proportionately taking home less, as a greater portion of their increased income is swallowed by tax.

“For everyday taxpayers, it may seem like they’re earning more, but their real spending power declines. It has become a quiet lever to increase revenue without officially raising tax rates.”

Indeed, many may feel that their salary increases are not helping them pay the bills. Rossouw shared the below example, which highlights the impact of bracket creep:

Mr X’s income and tax for the tax year 2024/2025

• Annual taxable income – R510,000
• Income tax: R77,362 + 31% x (R510,000 – R370,500) = R120,607 – R17,235 (primary rebate) = R103,372
• Income after tax: R510,000 – R103,372 = R406,628

Mr X’s income and tax for the tax year 2025/2026 if his income increases by 5%.

• Annual taxable income – R535,500
• Income tax: R121,475 + 36% x (R535,500 – R512,800) = R129,647 – R17,235 (primary rebate) = R112,412
• Income after tax: R535,500 – R112,412 = R423,088

Although Mr X’s income has increased by 5%, his after-tax income only increased by 4.05%, which results in a monthly reduction in purchasing power, Roussow said.  

This means that Mr X will be able to buy less with his after-tax income than he is currently able to buy. 

The problem is exacerbated by the rebates (primary, secondary and tertiary) not being adjusted for inflation.

Against this, Rossouw actively encouraged South Africans to adjust their financial plans. 

“Make sure you maximise your tax-efficient investments by contributing more to your retirement fund, for example, you can reduce your taxable income while growing your wealth. 

“Tax-free investment accounts allow you to benefit from tax savings on your investment return.”

Another way to beat bracket creep is to negotiate a salary increase that outpaces inflation and bracket creep. 

“Other options are to diversify your income streams by considering a side hustle or reducing unnecessary expenses,” she said.