More tax pain coming for South Africans

From 1 May 2025, South African consumers and businesses will feel the pinch as the value-added tax (VAT) rate increases by 0.5 percentage points.

In the 12 March Budget Speech, Finance Minister Enoch Godongwana announced that the VAT rate for 2025/26 would be raised from 15% to 15.5%.

This will be followed by another 0.5 percentage point hike the following year, raising the VAT rate to 16%.

Although this came as a slight relief compared to the 2 percentage point increase which was initially proposed in the postponed 19 February Budget, this hike was still met with a wave of criticism from consumers, businesses, and political parties alike.

Many experts have called this out based on the fact that South Africans are already “overtaxed”.

The economic pressure South Africans are under is evidenced by the large number of early retirement withdrawals made since the launch of the two-pot retirement system in September 2024 and the large amount of debt they owe.

Eighty20’s 2024 Q4 Credit Stress Report found that South Africans spend an alarming amount of their salaries on repaying debt every month, with consumers owing a total outstanding balance of R2.5 trillion.

Collop Tax Collective founder and tax expert Lance Collop explained on the Kaya Biz podcast that consumers will feel this 0.5 percentage point tax hike in every purchase.

Everything, from a cup of coffee to big-ticket purchases, will be more expensive come May.

Collop said one positive is that the basket of zero-rated goods has expanded, particularly basic proteins like chicken, pork, and fish, which will also be zero-rated.

While that is a welcome change, overall, this new Budget will hit South African pockets even harder.

Thankfully for consumers, this hike isn’t the initial 2 percentage points, “but, in this environment, and with a possible global recession looming, it makes a VAT increase more problematic in my view”.

Adding to the difficulty for consumers is the fact that personal income brackets remained unchanged for the second year in a row.

That means many people will be pushed into higher tax brackets without realising it, leading to more tax deductions and less money in their pockets.

This leads to a phenomenon known as “bracket creep”, where inflation-driven salary increases push earners into higher tax brackets, effectively raising their tax burden without an official rate hike.

Essentially, this means that although no official income tax increases were made, many South Africans will be hit on both sides – with less take-home pay due to bracket creep and less spending power due to VAT hikes and inflation.

“The reality is that people who are forced to pay taxes every month via the employee tax system are the people who carry the country,” Collop said.

On top of income taxes, this group also has to pay things like VAT and fuel levies – ”it can put one into quite a depressive state”.

It isn’t only consumers who will be feeling the hit of the VAT increase, though.

Collop explained that businesses will also have to deal with an administrative mountain, which will be especially difficult for small businesses which don’t have large financial teams.

“The amount of admin for such a small change is quite unfortunate,” he said.

There’s a need to update systems and invoicing processes, possibly even run concurrent invoicing systems.

There may be invoices issued after 1 May that must still reflect the 15% rate. Then there are refunds to deal with, also at 15%.

“It’s a whole lot of complexity and administrative burden, and then the intention is to do it again next year.”

In many ways, Collop said that if there has to be an increase, VAT may as well be raised to 20%, since that is where the country seems to be heading anyway.

He said SARS Commissioner Edwards Kieswetter knows that even this 0.5 percentage point increase is exacerbating the tax revolt that’s already underway.

Businesses may refuse to adhere to the 15.5% VAT rate and decide to do more deals in cash to increase their profits. “That is a reality,” Collop said.

He added that when the commissioner said increasing tax rates may lead to lower collections, that is a very real possibility.

The same applies to personal taxes since people may be looking to restructure their interactions with their company.

For example, Collop said they may modify the nature of the relationship to avoid it being classified as employment.