The hidden cost of salary increases in South Africa

South Africans who enjoy a salary increase above 5% this year are going to be getting poorer overall, thanks to the lack of adjustments to the 2025 tax backets.

Tax experts at Tax Consulting SA warned that the South African Revenue Service (SARS) will be after a bigger cut of flesh in 2025 after the National Treasury opted to tap into the tax base for an easy extra R18 billion.

In the 2025 budget, Finance Minister Enoch Godongwana announced that the tax brackets would remain the same in the coming tax year, leading to pain for taxpayers through bracket creep.

According to the South African Reserve Bank’s latest projections, inflation is expected to be around 4.3% in 2025—or even as low as 3.6% — which means that any salary hikes above these numbers could be taxed more.

Many people will be pushed into higher tax brackets without realizing it, leading to more tax deductions and less money in their pockets.

Tanya Tosen, a Tax and Remuneration Specialist at Tax Consulting South Africa, said that employees actually need a salary increase of at least 5% just to maintain their current spending power.

During a recent webinar hosted by CPD Consortium, Tosen broke down what this means for different salary brackets.

If a high earner at R2 million a year receives a 5.5% increase, they could end up with nearly R7,000 less in their take-home pay because of the higher tax bracket.

They would actually need a 6.13% increase just to break even, Tosen said.

If a middle earner, earning R360,000 a year, received a 4.3% salary increase, their marginal tax rate would jump from 26% to 31%.

“Without tax bracket adjustments, their PAYE tax would increase by nearly R4,200 per year, leaving them with less disposable income,” Tosen said.

Even public sector workers – who have negotiated a 5.5% salary increase for 2025/26 – will feel the impact of higher tax rates as they would actually require a 6.13% salary increase to keep up pace with the tax tables which weren’t adjusted for inflation.

SARS is hungry for money

At the end of 2024, salary experts predicted that average raises would range between 5.5% and 5.7% in 2025, depending on a company’s financial health. However, the 2025 Budget has changed the game.

This situation puts pressure on businesses to rethink how they structure salaries.

Tosen said that companies must now consider more flexible remuneration packages to ensure employees get the best value.

She suggested that employers opt for more take-home pay instead of non-cash benefits within flexible parameters if that’s what employees prefer, especially during tough economic times.

Another option is to consider customizable salary structures to help employees retain as much of their earnings as possible and flexible benefits to suit their personal and financial requirements.

“The bottom line is that employees should not be worse off, where this is correctly designed,” said Tosen.

Economists have warned that as the government puts more of a tax burden on South African taxpayers, they will increasingly try to find way to legally avoid paying more tax.

This is a result of stepping over the edge of the Laffer Curve – a point South Africa has long passed.

SARS should be particularly concerned about this at the highest level of income, where the wealthiest often have the most options when it comes to keeping their money out of the taxman’s hands.

South African taxpayers who are pushed over the Laffer Curve typically find ways to legally pay as little tax as possible or, in extreme cases, cut ties with South African tax residency altogether.

South Africa has lost thousands of millionaires over the past decade and SARS continues to see money lost as other taxpayers end their residency in the country.

SARS lost R3 billion in collectable tax in 2024 due to 38,000 taxpayers ending their tax residency.

Despite this, the Revenue Service is targeting thousands of millionaires it believes are not paying their dues in 2025.

Commissioner Edward Kieswetter recently pointed to many people earning over R1 million per year who are not even registered for tax, while he claims that there is R800 billion in revenue that is overdue.