The end of medical aid tax credits and fuel levy hikes – what to expect next week

Finance minister Enoch Godongwana is facing another R20 billion hole in the budget next week, and will likely be looking to the usual tax hikes to fill at least part of it.

This includes:

• Not adjusting income tax brackets (inflation tax)
• Hiking the fuel levy
• Increasing sin taxes
• Possibly, but unlikely, ending medical aid tax credits

This is the size of the tax collection gap that economists expect will be revealed when the minister makes his annual address on 19 February.

While many anticipate a relatively upbeat speech, the reality of lower tax collections cannot be escaped.

The more positive side of the story is expected to be underlined by a better economic performance thanks to more favourable weather conditions, a more stable power supply and lower inflation.

Modestly lower interest rates and greater global demand overall should also play into the picture.

However, economists at Nedbank also expect some negatives to creep through—such as downside risks to GDP growth, and the looming threat of a global trade war orchestrated by the United States.

Adding some more bitterness to the mix, the bank anticipated revenue collections to be lower than the 2024 Budget projection by some R20 billion.

The finance group said that FY tax collections should be higher than the 2024 Medium-Term Budget Policy Statement (MTBPS), but these were already lower than Budget 2024.

Boosting tax collections is an expected climb in personal taxes thanks to two-pot retirement fund withdrawals.

Company taxes will likely beat October’s projections as well, it said.

However, VAT growth will probably fall short of the MTBPS’s estimate, contained by the faster-than-expected deceleration in inflation.

What to expect from taxes

Despite the tax collection shortfall, though, Nedbank said there are unlikely to be any “significant” new revenue measures.

This is a view echoed by other economists as well.

Investec chief economist Annabel Bishop noted that “South Africa is taxed out” and that “the tax buoyancy ratio shows it cannot absorb more”.

This is something that Godongwana will acutely aware of, especially given the extra effort the South African Revenue Service (SARS) has had to put into collecting revenues from a more strained tax base.

In terms of the taxes that will likely come through, Nedbank said that personal income tax brackets will likely be left unchanged again, giving way to bracket creep and impacting anyone who scored a salary increase with or higher than inflation.

It also warned that the fuel levy—which has not been adjusted since April 2022—could be due for a hike, though this is likely to be contained to an inflation-related adjustment.

But this is not guaranteed.

“Considering the end of load-shedding and the relief it has brought to business operational costs, the (fuel) levy could be increased by more than inflation,” it said.

The other big tax question is medical aid tax credits, which are now on the chopping block given the signing of the NHI into law. It is now simply a question of “when” they will be axed.

Nedbank said that 2025 is unlikely to be the year—but the axe is coming.

“Medical aid tax credits could also be unchanged as the government prepares to introduce the National Health Insurance Scheme.

“Reports suggest the NHI legislation will be amended to make provisions for the continued existence of medical aid schemes alongside NHI, implying the withdrawal of tax credits in the future,” it said.

Nedbanks said that the other likely tax hikes in the 2025 budget will be related to sin taxes.

The excise duties on alcohol and tobacco products are expected to rise by the usual above-inflation adjustments.