One tax change will cost South Africans over R10,000 a year

The government’s plan to phase out medical scheme tax credits could cost taxpayers over R10,000 more a year, reducing take-home pay and making private healthcare less affordable, particularly for middle-income earners.

“The government’s plan to phase out Medical Scheme Tax Credits (MTC) is a major change in how healthcare is funded in South Africa,” Senior Tax Consultants at Tax Consulting SA, Hlengiwe Mkhize and Buyile Zondi, told Daily Investor.

“It supports the long-term goal of National Health Insurance (NHI) and a fairer healthcare system, but it could have a big short-term impact on taxpayers and private medical scheme members.”

Mkhize and Zondi explained that the MTC is a tax benefit given to taxpayers who contribute to a registered medical aid scheme for themselves and their dependents.

Dependents who can benefit from this credit include spouses, children, or any family member who relies on the taxpayer for financial support.

“Only contributions made to a registered medical scheme (under the Medical Schemes Act or similar laws in another country) qualify for this credit,” they said.

The credit reduces tax payable directly for the contributor (principal member). “It is more valuable than a tax deduction because it reduces your tax liability (rand to rand),” they explained.

Importantly, Mkhize and Zondi pointed out that medical insurance policies do not fall under the ambit of the Medical Schemes Act.

“This is a common misconception, as many taxpayers assume they can claim medical insurance premiums. However, only contributions to approved medical schemes qualify for the Medical Tax Credit,” they said.

“If your medical aid contributions are deducted through your employer’s payroll, the tax credit is automatically applied each month and reduces the PAYE (employee’s tax) you pay.”

If not, the taxpayer can ask their employer to include them, or they can claim the credit when filing their annual tax return.

“The Medical Tax Credit is a rebate, not a deduction. It reduces the amount of tax you owe, but it cannot result in a refund or be carried over to the next year,” they explained.

Mkhize and Zondi stressed that taxpayers should keep receipts for all medical expenses, as some costs not covered by their medical aid may also qualify.

This is especially true for those with a dependent who has a disability or is elderly. “In these cases, you may receive extra tax relief for out-of-pocket medical expenses,” they said.

MTC cut will cost taxpayers dearly

Mkhize and Zondi explained that the exact amount a taxpayer will save from the MTC depends on their age, the number of dependents they have, and whether they or their dependents have a disability.

To illustrate how much a taxpayer could save, they offered an example of a main member with four dependents. In this case, their tax credit would be:

• R364 each for the member and first dependent = R728
• R246 each for the remaining three dependents = R738
• Total monthly credit: R1,466
• Annual saving: R1,466 × 12 = R17,592

“People over 65 or those with disabilities may qualify to claim even more, as some or all medical expenses can be included,” they said.

However, the South African government has recently announced plans to phase out the MTC. If these credits are removed –

• Taxpayers will pay more tax and have less take-home pay, especially middle-income earners
• Fewer people may maintain private medical cover, increasing demand on the public healthcare system
• Funds previously used for tax credits may be redirected to support the NHI program

“While this could improve access to public healthcare, it may make private healthcare less affordable for those who rely on it,” Mkhize and Zondi said.

“Middle- and Low-income earners, in particular, may be affected most, as they rely on the tax credit to help cover medical costs. Employers may also face increased payroll administration and employee queries as the system transitions.”

Mkhize and Zondi said employers processing MTC through payroll will need to adjust their payroll systems once the credit is removed.

“Employees’ monthly PAYE deductions would increase accordingly, and communication around these changes would be essential to manage employee expectations,” they explained.

“Taxpayers’ healthcare planning remains a key part of financial management. Taxpayers should maintain emergency and healthcare savings and also consider gap cover or medical savings products to protect against unexpected expenses.”

Mkhize and Zondi added that maintaining private healthcare will cost more as the credits are phased out, something taxpayers will need to plan for.

They explained that taxpayers can navigate this credit cut by reviewing their medical cover to ensure it meets their needs.

They will also need to budget carefully for healthcare expenses and use available tax deductions where possible, and plan to reduce the financial impact.

“Clear guidance from National Treasury, SARS, and the medical industry will be essential to help people understand the changes and stay financially prepared,” they said.