Warning over R14,000 a year hit to South Africa’s middle-class

 ·25 Jan 2024

The Department of Health has already confirmed that medical aid tax credits will be cut in South Africa to fund the National Health Insurance (NHI) – but now it’s a question of ‘when’.

National Treasury has set an official date for the 2024 Budget, scheduling the event on the day most analysts had already set aside – 21 February 2024.

Finance minister Enoch Godongwana has already admitted that the 2024 Budget will be challenging for this department, with South Africa facing a massive budget deficit and little room to manoeuvre in tax revenues and funding cuts.

The tight budget situation means big-ticket items like the NHI have even less room for funding than before, even as the government rushes ahead with the plan.

Recent comments from president Cyril Ramaphosa about signing the NHI Bill into law have spurred worries that the government may fast-track at least some funding sources for the scheme – including one that will cost middle-class households between R4,400 and R14,000 a year.

In its current form, the NHI Bill only lays the foundation for the overall scheme, allowing for the establishment of the NHI Fund to finance it and elbowing out the private healthcare sector by limiting the participation of private medical aids.

The bill itself does not mention how the scheme will actually be funded, nor the services it will provide – these will only be determined later – leading to mounting concerns and questions over its viability.

As opaque as the National Health Department has been around questions of how it will fund the estimated R600 billion a year system, it has been clear that tax hikes, new taxes and removal of tax rebates would be used to do so.

Because the NHI has a long-term implementation plan, it is unlikely that any of these tax measures will be introduced in the near term – least of all in 2024 when room for additional tax measures is close to non-existent – but the removal of rebates like medical aid tax credits could be a relatively quick and easy stopgap.

According to the South African Institute of Taxation’s CEO Keith Engel, talk of removing medical aid tax credits has been around for more than a decade, alongside the push to nationalise healthcare. Speaking to Citywire, he said that the plan to get rid of the incentive had been knocked around since 2008.

Medical aid tax credits are incentives given to taxpayers in the form of a non-fundable rebate that reduces the total tax paid by R364 per month (2023/24) for the principal member of a registered medical aid scheme, R364 for the first dependent and R246 for subsequent dependents.

For an individual taxpayer, this works out to just under R4,400 in reduced taxes – while a family of four would cut their taxes by R14,000.

According to Engel, the rebate is seen by some in the government as subsidising private healthcare, and getting rid of the tax credits is “the easiest money for the NHI” – ‘saving’ the government about R21 billion that it would otherwise ‘give back’ to taxpayers.

However, it is definitely not enough to fund the NHI in its entirety.

Various researchers, economists, and analysts have pointed out how massive tax hikes will be required to fund the scheme fully – including extreme measures like hiking VAT above 20%, introducing massive surcharges on income tax, and raising corporate tax.

While the removal of the medical aid tax credit would ostensibly be tied to the implementation timelines of the NHI, healthcare analysts have noted that it is something that could be predetermined long before the implementation of the NHI.

What may be a relief to taxpayers in South Africa is that none of these tax measures – or the end of medical aid tax credits – is likely to happen soon, with no real indications that these will be raised in the 2024 budget.

In the medium-term budget policy statement (MTBPS) delivered in November 2023, Godongwana pencilled in ‘only’ an additional R15 billion in new tax measures in 2024 – something which could be raised by not adjusting the tax brackets for inflation.

Instead, the minister has placed more emphasis on more intensive tax collections by SARS to recover money that is owed and more conservative spending by government departments.

Meanwhile, the NHI will likely face many years of implementation issues, court challenges, and major pushback from the private sector. But with the NHI Bill signed into law, the government will be open to launch its plans to find the funding it seeks.

Read: ‘Whether you like it or not’ – Ramaphosa vows to sign NHI into law

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