Medical aid tax credits, fuel levies and VAT – what to expect in South Africa’s new budget

Finance Minister Enoch Godongwana is set to table his revised budget for 2025 on Wednesday (12 March). Economists expect taxpayers to suffer even without a massive VAT hike.

Economists at Nedbank anticipate that the 2025 Budget 2.0 will be vastly different from what was to be presented in February.

The original budget set about hiking VAT to 17% to raise R58 billion in 2025 to fund the government’s bold spending plans.

However, with a two percentage point VAT hike off the table, other trade-offs will probably be coming.

These are the biggest tax changes expected in the new budget compared to the original plan:

VAT hike

The big fight in the original budget was over the VAT hike, which partners in the Government of National Unity (GNU) have nixed for 2025.

However, it is unlikely that a VAT hike in some measure can be avoided, with Nedbank expecting a 0.5%-1.0%pt increase to be announced on Wednesday.

Treasury has stressed that South Africa’s VAT is still lower than the 19% seen in peer countries, which Nedbank’s economists have interpreted as a concerted move towards that level.

They said to expect more VAT hikes in the coming years.

• Original Budget: 2%pt hike in VAT to 17%
• New Budget: 0.5-1.0%pt hike in VAT, with more hikes in 2026 and 2027

Personal Income Tax

The original budget envisioned small below-inflation adjustments to the tax brackets to give some relief to taxpayers while still drawing in R1.5 billion in revenue.

With the original VAT plan out, Treasury is likely to nix these adjustments and keep tax brackets the same for 2025, pulling in even more revenue.

• Original Budget: Marginal below-inflation adjustments to tax brackets to provide some relief.
• New Budget: No adjustments to tax brackets, feeding bracket creep.

Fuel Levy

The fuel levy and Road Accident Fund levy have been frozen since 2022, and the original budget wanted to continue this for another year.

This would have translated to R4 billion in ‘relief’ for taxpayers.

However, Nedbank’s economists now anticipate hikes to these taxes this week, with more hikes to come in the following years as Treasury looks to make up the shortfall.

• Original Budget: No adjustment for fuel levies
• New Budget: General fuel levy and Road Accident Fund levy adjusted higher, with more coming

Medical aid tax credits

Similar to the tax brackets, the original budget saw no inflation-based adjustment for medical aid tax credits in 2025, which would have drawn in R1.5 billion.

They expect the same in the new budget.

However, the days are numbered for this tax break, with the government’s intention to eventually do away with them to assist in funding the National Health Insurance (NHI) scheme.

The economists do not expect the trigger to be pulled just yet.

• Original Budget: No adjustment for inflation, but still applicable
• New Budget: No adjustment for inflation, but still applicable

Sin taxes

Excise duties on alcohol and tobacco were already well above inflation in the original budget. The economists now expect it to be even bigger.

Consultations on a three-tier progressive tax rate on wine and beer are also planned for 2025.

• Original Budget: Alcohol adjusted up by 6.8%, tobacco adjusted up by 4.8%-6.8%
• New Budget: Previous adjustments moved even higher, and escalated over the next few years.

Spending problem

While it is clear that the National Treasury will have to make some serious adjustments to how it plans to raise revenue, it is unclear what will be done on the expenditure side to balance it out.

Nedbank noted that, despite the Treasury’s calls for fiscal consolidation over the years, the government has been unable to contain the rapid increase in public debt and spending.

In the original budget, expenditure was again budgeted to rise more than anticipated due to higher non-interest spending, particularly in social spending and infrastructure investment.

Expenses were up 8.1% versus the MTBPS estimate of 4.8%.

The main spending spree was to facilitate the hiring of skilled workers in health, security and education, fund the Social Relief of Distress (SRD) grant and to cover the growing public wage bill.

Nedbank noted that no allocations were made for the SRD grant for 2026 and 2027 beyond administrative amounts—but the 2025 costs were at R35.3 billion.

But the grant is unlikely to go away. In fact, it will cost more than budgeted for.

“We believe the SRD grant bill will increase to R40 billion in the subsequent two years after (2025),” the bank said.

The public sector wage bill is estimated to rise by 8% in FY2024/25, absorbing 38% of revenue to accommodate the higher wage settlements reached in 2024 and enable the hiring of critical workers such as doctors, nurses, teachers, and police officers.

Nedbank said that wage bill growth was estimated at an annual average of 5.7% over the medium term in the original budget, but there is a likelihood of higher increases unless departments manage to restrict their headcount.

By Nedbank’s account, it appears likely that the expenditure side of the original budget was underestimated, meaning South Africa is heading for a crisis.

“The VAT increase should magnify the fiscal crisis that South Africa is headed for,” Nedbank said.

“For over a decade, expenditure has outpaced revenue growth, resulting in wide budget deficits and an ever-rising public debt ratio.

“The time to tackle expenditure inefficiencies seriously is now.”