What it takes to be middle-class in South Africa right now

 ·12 Apr 2022

Mike Schüssler, Brenthurst Wealth consulting economist, has published a new research note on what it takes to be middle-class in South Africa and how people are increasingly being squeezed out of the group.

Schüssler notes that there is no single universal definition for ‘middle class’, with the report instead focusing on the group of people who would, at least, be those who work.

“The percentage of people working in South Africa is one of the lowest in the world. In 2020, less than 36% of the South African population above 15 years of age were working, according to the World Bank. Since 2020 it seems that South Africa has regressed by about 200 basis points to less than 34% if one uses the latest Quarterly Labour Force Survey data,” he said.

“Unemployment in South Africa rose to a record 35.3% in the 4th quarter of 2021. The number of unemployed people increased by 278,000 to 7.9 million. This should be a big worry for not only the Government of South Africa but for each and every citizen. If this trend continues, which seems to be the case – the unrest we have seen in July 2021 will be the tip of the iceberg.”

At present, about two-thirds of the employed in South Africa work in the formal market, which is relatively high for a labour force in the developing universe, Schüssler said.

However, as a result of so few who work, it means that overall, fewer than 25% of adults over the age of 15 actually get a regular paycheck from a formal employer  – excluding domestic and farm workers, he said.

In most countries, the person who earns a typical salary would pay personal income tax, but that is not the case in South Africa, Schüssler said. This effectively means that those that pay personal income tax can be considered upper-middle-class, he said.

“However, this does not translate to being rich, as upper-middle-class is then effectively classified as a working person who earns an annual income upwards of just R87,000. The irony is that many of the top 10% of earners in South Africa would fall into the lower-middle class in many other countries.

Earnings and tax

Given the importance of the middle class in South Africa, the small size of the middle class is of particular importance, Schüssler said.

He noted that there has been a clear downward trend in the number of registered taxpayers with earnings above the annual tax threshold. In the fiscal year ending March 2022, there were 6.8 million taxpayers, compared to 6.95 million five years ago, and just 6.3 million 10 years ago.

“In 2021 the bulk of the registered taxpayers, a notable 69% of the total taxpayers, earned between R87,300 and R350,000 per annum. However, taxpayers who contribute toward the personal income tax (PIT) revenue constitute only 18% of the total working-age population.

“Interestingly, in the 2022 tax year, one only had to earn a taxable salary of R87,300 per year, or a little less than R7,500 per month, to be liable to pay personal income tax in South Africa.

In many developed countries, and quite a few developing countries too, this income would not even lift the person out of the lowest third of earners overall, Schüssler said.

He added that most South African personal income taxpayers would, in many cases, not make the top 50% of the working population.

“It is a well-known fact that the higher income categories i.e., individuals earning more than R1 million per year, constitute only 4% of all taxpayers and less than 0.5% of the population, yet they contribute 37.7% of all PIT.”

The squeeze

According to the World Competitiveness Report, South Africa has the fourth-lowest share of employed people who pay income tax.

Combined with being in the bottom 5% of countries with regard to the percentage of the population who are employed, South Africa should have the smallest share of the population paying personal income tax – at least as a share of the adult population – in the world today, Schüssler said.

“The upper-middle-class are typically the people in formal jobs, earning fixed salaries and paying PAYE every month. They are the people that buy cars, houses and often have young children and some form of medical aid cover. They are the group of people that, idiomatically speaking, keep the wheels of the South African economy rolling,” he said.

“This small upper-middle class in world terms collectively has the 10th highest personal income tax burden in the world, yet they must use their own after-tax income to give them a sense of security, schooling of an international standard, reasonable medical care and a host of other things, as the government cannot always provide these.”

He added that this small middle class pays personal income tax which makes up approximately 38% of the government’s income. Data from the OECD shows that only five other countries have a similar or higher share of personal income tax that is paid to the government.

“As a share of the adult population, less than 20% are liable for personal income tax. This is roughly one in six adults. I know of no other personal income tax-paying country where such a small share of the adult population pays the bulk of all tax income and receives so little in return.

“The problem is that the middle class has been squeezed over the last two years, with one in eight jobs lost and very little inflation adjustment for many of the salaried employees, while commitments such as medical insurance, school fees and the like increase.”

Read: SARS will start going after taxpayers with these assets: experts

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