Big tax hikes for South Africa are coming
The African National Congress (ANC) has planned major social security changes for the country—the main ones being the BIG and the NHI—pointing to tax reforms and hikes as the main source of funding.
Social welfare has always featured prominently in campaign promises over the last 30 years, but the stagnant economy and resultant high cost of living in recent years have sharply focused the issue ahead of the 2024 elections.
Over the past five years, rampant load shedding, logistic inefficiencies, and failing infrastructure—like the water supply crisis in parts of the country—have put pressure on the current administration and its chances in the elections.
As a result, President Cyril Ramaphosa doubled down on his populist promises and policies, which included the signing of the National Healthcare Insurance (NHI) into law and the establishment of a foundation for a Basic Income Grant (BIG) by expanding and extending the Social Distress Grant (SRD) to 2025, and potentially beyond to 2027.
Additionally, the ANC’s 2024 election manifesto also wants to revive an apartheid-era policy compelling pension funds to invest in government-approved investments.
While these initiatives could theoretically benefit South Africans, they require much more money than the government currently generates through revenue.
This ‘extra’ amount needed to fund these programs is immense and, given the country’s massive debt bill, will have to come from taxpayers – which means big tax hikes for the country’s already narrow tax base.
These initiatives and the big tax hikes needed as a result are explained below.
NHI
While the implementation process and exact funding mechanisms for the National Healthcare Insurance (NHI) scheme are still vague, the government has made it clear that the scheme will be funded by ending medical aid tax credits and introducing new taxes.
The government’s ideal scenario involves redirecting taxpayers’ after-tax spending on medical aid and private healthcare into the state’s coffers to increase its available funds.
However, this still won’t be enough.
According to a report by the Solidarity Research Institute (SRI), South Africa’s National Health Insurance (NHI) plan requires an additional R295.93 billion
Researchers have stated that to raise the conservative estimate of over R200 billion—and assuming that the number of taxpayers, their spending, etc., remains constant—will require that:
- VAT increase from 15% to 21.5%;
- OR personal income tax rates increase by 31% across the board;
- OR a payroll tax on those employed in the formal, non-agricultural sector of an estimated R1,565 p/m.
Using the Department of Health’s 2% surcharge and 2% payroll tax, a South African earning an average salary of R26,000 a month would have to pay an additional R1,040 a month to fund the NHI.
The removal of the R364 per month medical aid tax credit easily pushes this up to an effective R1,440 tax per month.
Basic Income Grant
Much like the NHI, which is promised to begin in 2026, Ramaphosa has said the ANC would finalise a comprehensive policy on an income grant within two years if it returns to power after the 2024 election.
Speaking to Bloomberg on Wednesday (22 May), the party said it would use the existing Social Relief of Distress Grant as the foundation for the transition to a permanent basic income payment.
ANC spokeswoman Mahlengi Bhengu-Motsiri also noted that the value would increase—over and above the already R20 increase as of 1 April—and be extended to more South Africans, which again will require more money.
The SRD grant was allocated R33.6 billion in 2024/25 (with the hike to R370 later adding about R2.2 billion to that), with provisional allocations of R35.2 billion and R36.8 billion for the 2025/26 and 2026/27 financial years.
Outside of its intent to eventually introduce a basic income grant in South Africa, Ramaphosa and Treasury have been vague on the details and the financing plan.
However, the ANC has previously suggested that the grant be funded through a wealth tax, closing tax loopholes, addressing base profit shifting by corporations, and implementing a transactions tax.
Prescribed assets
The ANC’s election manifesto states it will “engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy through prescribed assets”.
Prescribed assets require retirement funds to allocate a percentage of their assets to specific government-approved instruments.
This policy was initially established in 1956 to compel retirement funds to invest approximately half of their assets in the South African government and parastatal bonds.
While not an immediate tax, this risks retirement vehicle values in the future.
Old Mutual explained that the main objection to prescribed assets is that they usually apply to investments without sufficient demand or merit.
According to Old Mutual, if the assets had sufficient investment merits, there would be no need to prescribe them.
Nominating an instrument as a prescribed asset invariably creates artificial demand for it, which would not have existed in an open market.
If the instrument is narrowly defined and supply is limited or controlled, its price is likely to rise. “From an investment point of view, and all things being equal, a higher price implies lower expected future returns,” Old Mutual said.
The risks
Renowned economist Dawie Roodt has noted that increasing taxes risks increased tax evasion and capital flight, as many of those who will have to shoulder the increased tax will simply choose to leave the country.
According to Roodt, only 1.12% of taxpayers (roughly 163,702 South Africans) pay 30% of total personal income taxes in the country, while 19% pay a whopping 87% of total personal income taxes.
Additionally, a staggering 0.09% of corporate taxpayers (only 770 companies) pay 62.5% of total corporate income tax, with 4.4% paying 95% of total CIT.
“This means the country has an alarmingly narrow tax base, which is a massive concern for the state’s finances. You cannot increase this.
“If this increases, the tax base will collapse as many of the 1.12%, as well as businesses, will simply leave the country – which they are already doing,” said Roodt.
Read: South Africa’s economy grew slower than Zimbabwe – but Ramaphosa celebrated it
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