Tax collapse warning for South Africa

The latest tax statistics show that 3.94% of taxpayers pay half of all income tax in South Africa.

Efficient Group Chief Economist Dawie Roodt warns this is bad news for a country that relies heavily on a very strained tax base—and if the government pushes taxpayers any further, it could collapse its collection efforts.

According to the latest tax statistics from the National Treasury, personal income tax (PIT) is the government’s biggest revenue source.

PIT is expected to generate around R811.1 billion in the upcoming financial year, followed by value-added tax (VAT)(R499.5 billion) and corporate income tax (CIT)(R331.3 billion).

The money is used to fund key expenditures such as civil servant salaries, infrastructure projects, health, education, and social grants, among others.

According to the latest tax statistics from the National Treasury, 569,351 South Africans who earned over R1 million per annum paid tax in the 2025/26 financial year.

This is a 78,675 or 16% increase in the number of millionaires who pay tax from the 490,676 reported in the previous 2024/25 financial year.

After initially planning marginal adjustments to income tax brackets in the original budget in February, the National Treasury has opted for no adjustments in the revised budget.

This means that taxpayers will fall prey to inflationary bracket creep. Finance Minister Enoch Godongwana had to implement this trade-off to cover for the country’s heavily reduced VAT increase.

However, economists warn that South Africa’s tax base has reached its limit, and any additional increases, including the freeze on PIT brackets, are bad news for the country.

While the number of high-earning taxpayers has increased, they represent only 3.94% of 14.45 million registered taxpayers in South Africa, responsible for almost half (49%) of total PIT revenue.

These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27. The personal income tax proposals, effective 1 March 2025, are expected to raise R19.5 billion in revenue.

Efficient Group Chief Economist Dawie Roodt told BusinessTech that the government will not collect the revenue it expects from PIT because South African taxpayers have reached their limit.

He explained that not adjusting the tables is bad news and that having so few taxpayers responsible for such a large portion of revenue means tax revenue is at risk of collapsing if the government isn’t careful.

“Having a small number of people pay the majority of the taxes indicates that there are very few wealthy individuals in South Africa. We actually need more rich people in the country,” said Roodt.

“But currently, the tax burden is concentrated on a small group paying a significant portion of the taxes. Ideally, we should have a broader base of high earners to distribute the tax load more evenly.”

Regarding budget expectations, Roodt does not believe the government will achieve the revenue targets it has set. This is because South Africa has moved beyond the optimal point on the Laffer Curve.

The Laffer Curve suggests there’s an “optimal tax rate” that maximises government revenue, where increasing tax rates beyond this point can actually lead to a decrease in tax revenue collected.

While there was no official increase in tax brackets, bracket creep means that individuals are effectively paying higher personal income taxes as they move into higher brackets.

“It is for this reason and several others that I do not believe the government will be able to collect the additional revenue they are expecting,” Roodt said.

“Another reason is that the economy is not growing at a pace that would support an increase in employment, which is an assumption in their revenue projections.”

Additionally, he said that he doesn’t believe the government will collect the R13.5 billion it has budgeted from the 0.5% VAT increase.

“I think they have overestimated the second-round effects of demand in the economy. Realistically, they will likely generate closer to R10 billion from VAT, and personal income tax revenue may fall short by R1 billion or R2 billion—possibly even more.”

Roodt warned that if personal income taxes are increased any further, future tax revenue will come under tremendous pressure and could eventually collapse as a sustainable revenue source.

“My work involves managing the finances of high-net-worth individuals, and I can confirm that many are moving their money out of the country,” he said.

He explained that their argument is simple: they feel overtaxed and no longer want to be taxed in South Africa. Moreover, many high earners work in industries that allow them to operate remotely.

“If tax rates increase further, they will find ways to structure their tax affairs to minimise what they owe locally,” Roodt warned.

“Raising personal income tax further would only exacerbate this issue and create even more economic challenges.”