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

With nowhere else to run, South Africa’s third budget is widely expected to finally bring down the axe on government spending, but taxpayers won’t be spared from the pain.

Market analysts, economists, and portfolio managers will all be watching the tabling of Budget 3.0 on Wednesday (21 May), and there is at least some consensus on what to expect.

Most budget previews anticipate a much lower growth forecast, a wider budget deficit, sizeable cuts to spending programmes, and a host of smaller tax changes to make ends meet.

Analysts are also united on the view that the government will not turn to markets to raise additional funding and put the country into more debt, as South Africa’s debt levels are already too high.

But this does not mean that the budget will be simple or even easy on taxpayers.

The government has already learned the hard way that there is simply no appetite for more taxes in the country.

However, even without the reviled VAT increase, the revenue side of the budget is still expected to turn the tax scew a bit tighter.

This could see previous taxpayer ‘relief’ measures on the chopping block, and the same stealth taxes still in tow.

Patrick Buthelezi, economist at Sanlam Investments, said that the revenue-raising measures announced in March (Budget 2.0) will probably be maintained.

This includes not adjusting personal income tax brackets for inflation and introducing an above-inflation increase in excise duties.

Meanwhile, fuel levy “relief” and savings from additional zero-rated food items could very well be reversed.

Buthelezi also said a continued effort to strengthen the South African Revenue Service (SARS) will likely continue.

SARS previously noted that close to half a trillion rand’s worth of taxes owed remain uncollected.

Many political parties suggested that SARS’ collection targets be adjusted higher to make up for the loss of the VAT hike, but this is not guaranteed income.

Additionally, South Africa’s budget deficit is likely far higher than just what was lost from removing VAT, thanks to the weaker growth outlook for the country.

Thus there is no quick fix, with Budget 3.0 reportedly coming in with around R60 billion in budget cuts, on top of smaller tax measures.

Expected tax changes

These are the biggest tax changes expected in Budget 3.0. compared to versions 1.0 and 2.0.

VAT hike

The big fight in the original budget was over the VAT hike, which partners in the Government of National Unity (GNU) outright rejected, leading to Budget 1.0 not even being tabled.

With Budget 2.0 in March, National Treasury compromised to two 0.5 percentage point hikes over two years.

This was rejected by the second largest party in the Government of National Unity, the DA, which voted against it every step of the way, and ultimately took the matter to court.

Despite securing the necessary votes in committees and the National Assembly to push ahead with the VAT hike, the choas on vitrol around the tax — and a court-approved settlement with the DA — ultimately saw the budget withdrawn and the process started again.

While other changes in Budget 3.0 remain to be seen, analysts are confident that the National Treasury won’t try a third time with VAT.

• Budget 1.0: 2% pt hike in VAT to 17%
• Budget 2.0: 0.5% pt hike in VAT in 2025 and 2026, taking VAT to 16%
• Budget 3.0: No change in VAT, sticking to 15%

Personal Income Tax (Bracket Creep)

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 lower VAT plan in Budget 2.0, Treasury nixed these adjustments and kept all tax brackets the same for 2025, drawing in R18.5 billion in revenue.

Despite smaller parties making a lot of noise about getting rid of bracket creep – a claim that fell away to the wider VAT debate – this measure is expected to remain intact for Budget 3.0.

• Budget 1.0: Marginal below-inflation adjustments to tax brackets to provide some relief.
• Budget 2.0: No adjustments to tax brackets, feeding bracket creep.
• Budget 3.0: 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.

A few analysts and economists expected the National Treasury to make up for some of the VAT losses in Budget 2.0, but Godongwana surprised by keeping the freeze intact.

However, with the VAT hike now fully removed and the budget deficit expected to be much wider, motorists may not be as lucky the third time around. Economists have again flagged possible fuel tax hikes in Budget 3.0.

• Budget 1.0: No adjustment for fuel levies
• Budget 2.0: No adjustment for fuel levies
• Budget 3.0: General fuel levy and Road Accident Fund levy could be adjusted higher

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.

This carried over to Budget 2.0, with the same amounts.

However, some analysts and economists have flipped on this again. While none expect the credit to be pulled in its entirety, there may be a reduction in the amount given through the rebate.

A wider view is that 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 trigger is expected to be pulled eventually, but for now it might just be a small stop-gap to boost revenue in the near-term.

• Budget 1.0: No adjustment for inflation, but still applicable
• Budget 2.0: No adjustment for inflation, but still applicable
• Budget 3.0: Possible reduction in value, but still applicable

Sin taxes

Excise duties on alcohol and tobacco were well above inflation in the original budget.

While economists anticipated these taxes to be pushed higher in Budget 2.0, they were largely maintained.

As with some other taxes, the goodwill highway may have run out of road for sin taxes, and smokers and drinkers may find themselves paying more after Budget 3.0.

• Budget 1.0: Alcohol adjusted up by 6.8%, tobacco adjusted up by 4.8%
• Budget 2.0: Alcohol adjusted up by 6.8%, tobacco adjusted up by 4.8%
• Budget 3.0: Taxes could be pushed higher