For many years, it has been common practice for the government to adjust the progressive income tax tables for inflation in South Africa annually.
Over the years, commentators have often lamented that these adjustments, in reality, did not fully cover inflation and that taxpayers were being subjected to bracket creep.
Bracket creep’ is commonly understood to be the unmitigated impact of inflation on the progressive tax tables. The impact of adjustments to the tables that do not adequately cover for inflation, coupled with inflationary increases in salaries can include pushing taxpayers into higher tax brackets and diminishing the real value of rebates, credits, deductions and exemptions.
If what we had before resulted in bracket creep, then the decision not to adjust the tax tables for the 24/25 year of assessment can best be described as bracket onslaught, except that it is a stealthy move that tends to go unnoticed by most taxpayers. Taxpayers, for the most part, were simply relieved at avoiding an increase in tax rates. Therefore, it is important to discuss the areas of concern about this approach to increase tax collections so that taxpayers are not under any illusion about the actual impact of the decision.
A regressive move within a progressive tax
The taxpayers who are the least impacted by this decision are those in the highest tax bracket. They will not bear the brunt of being pushed into a higher bracket. At most, they would feel a slight pinch from the decline in value in real terms of their rebates and deductions. It is, therefore, a relatively regressive approach to collecting additional taxes; it impacts the wealthiest the least. It flies in the face of the principle of the progressivity of personal income tax. This aspect is far less visible in this form than it would be, for example, in an increase in the VAT rate (which admittedly would have a further reach) and elicits far less outrage.
Gender inequality
SARS' 2024 tax statistics make it clear that women are overrepresented in the lowest tax brackets, especially those on the cusp of the tax threshold. A decision not to adjust the tax tables, therefore, necessarily has a gendered impact. One approach could have been to at least increase the lower brackets and/or the threshold (by increasing the primary, secondary and tertiary rebates), which would have gone a long way to mitigating the gendered outcomes of this decision and would also have addressed aspects of the regressive effect discussed above. However, the impact on the middle of the bracket and the middle class should also not be underestimated.
‘Black tax’
It is no secret that people of colour within the rising South African middle class pay a tax colloquially referred to as ‘black tax’ over and above their official contribution to the fiscus. ‘Black tax’ refers to the expectation that people of colour care for their immediate and extended family in addition to themselves in order to mitigate lingering systemic inequality from racial and other discrimination. Unfortunately, the SARS statistics do not include a racial breakdown and therefore, the hypothesis that people of colour, especially women of colour, would be most impacted. However, this lack of adjustment cannot be tested.
A segment of taxpayers already under pressure
Having mentioned this regressive effect and that the wealthy are the least impacted, it is important to note that personal income tax has for some time been the largest source of revenue for the fiscus. In reality, SARS’ 2024 statistics show that only approximately 7.5 million personal income taxpayers actually contribute. Further analysis reveals that about 1.6 million taxpayers earning over R500 000 per annum contribute approximately 70% of all personal income taxes. It is thus clear that personal income taxpayers in South Africa, including, and perhaps especially, the wealthiest among them, are under huge pressure and have been for some time. Factoring in the recent interest rate hikes, fuel hikes and other economic difficulties, one must wonder how long the base can hold. Also of concern is that the largest portion of these taxpayers are between 25 and 54 and, therefore, still have a long time to make a real economic contribution to South Africa. This is not a base that the fiscus would want to alienate any further.
The BRICS Wealth Report reveals a 20% decline in South African millionaires between 2013 and 2023. In the same period, wealth grew significantly in China and India. SARS’ 2024 statistics show that between 2017 and 2023, 38 000 people ceased tax residency in South Africa. This number is not insignificant, particularly if we make the logical assumption that most of them come from the 1.6 million above. This chips away at the already extremely small personal income tax base in an untenable way; yet, we have not seen any concerted effort to address this.
Frozen tax tables are not unprecedented
It is also important to note that the freezing of tax tables is not unique to South Africa. Reuters points out that the UK has had frozen tables since 2021 and has confirmed an extension up to the 28/29 year of assessment. Political campaigns run on promises not to increase tax rates; however, they achieve the same effect by not adjusting the progressive tax tables for inflation. The British government will collect an estimated 34 billion pounds extra per annum due to its tax table freeze. Data released by HMRC shows that 26% more elderly people are paying personal income taxes due to the table freeze. A stealth tax such as this can, therefore, clearly have undesirable social consequences which tend to go unheeded and do not cause as much political upheaval as tax-rate hikes would— even though it amounts to the same thing.
Looking ahead
It would be interesting to see what happens to the current South African personal income taxpayer base if the government continues to take a leaf from the HMRC’s book and leaves the individual tax tables unadjusted for another year or for several more years. As it stands, unless it gets fixed retrospectively, it is a few steps backwards that we will never recover.
South Africa is not comparable with the UK; it would be a mistake not to consider our unique circumstances when running a policy such as this. South Africa already has one of the highest tax rates in the world. However, if you look at countries near or above our highest marginal rate of 45%, including the UK, you will invariably find that their government-funded social services significantly outweigh those of South Africa.
South Africa has among the highest income inequality in the world and there is no doubt that a progressive personal income tax is necessary. Having said that, given how important their contribution is, it might be time for the government to make a more concerted effort to take better care of their extremely small base of personal income taxpayers. This could include stimulating economic growth for smaller businesses, encouraging the return of emigrants and enticing foreign skilled workers to our shores. The bare minimum to be expected in this regard would be inflationary adjustments to the tax tables. We can only live in the hope that we do not remain frozen in more ways than one.
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