Income tax shock for middle-class South Africans earning R350,000 per year

The Organisation Undoing Tax Abuse (OUTA) has rejected the National Treasury’s latest tax proposals. It revealed that the lack of inflation adjustments to tax brackets has cost South Africans thousands of rands in extra tax over the last 13 years.

In a submission to the Standing and Select Committees on Finance, OUTA criticised the latest freeze on personal income tax brackets.

The civil group organisation argues that it unfairly punishes South Africa’s already overstretched tax base.

It said that the freeze, along with below-inflation adjustments and other tax measures such as the VAT increase, are scapegoats for a government that continues to ignore the need to address corruption, waste and inefficiency.

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

This freeze means taxpayers will fall prey to inflationary bracket creep, which risks placing employees who’ve received an inflationary salary increase into a higher tax bracket.

OUTA believes this is unacceptable, given that the Treasury has repeatedly adjusted the PAYE tax brackets below the official CPI inflation rate for several years.

“Since 2012, there have been only three years where the PAYE tax brackets were adjusted higher than inflation,” said OUTA.

These three years include 2012 by 1%, 2021 by 1.9% and 2022 by 0.5%. In every other year, the tax bracket creep has been below inflation as follows:

As illustrated by the above figures, since 2012, the National Treasury has adjusted personal income tax brackets below the official inflation rate in 11 out of 14 years.

As a result, South African taxpayers have endured a cumulative 26 percentage point disadvantage due to inflation.

To show the impact this has had on South Africans, OUTA CEO Wayne Duvenage revealed the extra tax an average employee earning R30,000 has paid to the government over the period.

“For a middle-income earner on around R350,000 per year, the failure to adjust brackets in line with inflation has cost them over R85,000 in extra taxes since 2012,” said Duvenage.

“This is a stealth tax that Treasury has imposed by not adjusting tax-bracket increases to keep pace with inflation, thereby hitting the pockets of ordinary citizens while service delivery declines.”

National Treasury has indicated that the impact of not adjusting the tax brackets and rebates for the next year will generate an additional R19.5 billion in 2025/26.

Going forward, this will equate to an additional R20.6 billion in 2026/27 and R22 billion in 2027/28 in revenue squeezed from South African taxpayers.

Risk of tax base collapse

In light of the increasing tax burden on South Africans, Duvenage and Efficient Group Chief Economist Dawie Roodt believes the country’s tax base is overstretched and overtaxed.

The national Treasury’s tax estimates show that only 3.94% of 14.45 million registered taxpayers in South Africa are responsible for almost half (49%) of total PIT revenue.

Roodt told BusinessTech 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.

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. Additionally, 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.”

Duvenage added that the latest freeze on bracket adjustments would hit the pockets of ordinary citizens while service delivery declines, adding another layer of financial strain to overstretched taxpaying individuals.