Beatrie Gouws, Tax Director at BDO, and David Warneke, Assoc. Prof. and Tax Partner at BDO, share their insight into the implications of the 2024 budget for taxpayers across all economic tiers.

South Africans breathed a collective sigh of relief as the 2024 budget avoided any rate increases to income tax for the 2024/2025 fiscal year.

However, while there were no rate increases, the tax tables were not adjusted for inflation either, which means different scenarios for different taxpayers across the top, middle, and bottom tiers.

Traditionally, government adjusts tax thresholds annually to counteract the effects of inflation. However, for 2024, these thresholds will stay the same. This means the possibility of so-called “bracket creep” for earners other than those already at the highest tax rate.

Bracket creep means that if you get an inflation-related raise, you might be pushed into a new tax bracket and pay relatively more in tax. Individuals are expected to pay R16 billion more in tax during the 2024/25 fiscal year.

Here is where earners in each tier can further expect to feel the impact of what was tabled.

Will top-tier taxpayers feel pressure to emigrate?

Historically, top-tier taxpayers have borne the brunt of tax hikes and policy changes aimed at redistributing wealth and bolstering social programmes. However, in recent years, there has been a growing sentiment of discontent among high-income earners, who argue that excessive taxation stifles entrepreneurship and undermines economic growth.

Another growing concern for the health of the economy is the number of top-tier earners who are choosing to emigrate due to, amongst many other reasons, increasingly high taxes.

The 2024 BRICS Wealth Report has revealed that many super-wealthy individuals are leaving South Africa. The report highlighted that at the end of 2023, South Africa was home to 37 400 US dollar millionaires (including 102 centi-millionaires and five billionaires) – a 20% decline from 2013. This means South Africa has lost approximately 9 350 US-dollar millionaires over the past ten years, although this is also due to the devaluation of the rand against the dollar over this period.

Tax statistics provided by SARS show that over 32 000 people ended their tax residency in South Africa between 2017 and 2021. Of those individuals, approximately 2 700 earned more than R500 000 annually and 1 100 earned more than R1 million annually.

If an increasing number of South Africa’s richest people leave the country, the number of those relatively few taxpayers who pay tax will decline. This includes South Africans who have been living outside of the country for many years who, if they cease their South African tax residency, will no longer pay tax in the country on income earned from a non-South African source.

In the aftermath of the 2024 budget speech, affluent taxpayers will be scrutinising the fine print of tax legislation, the possibility of the introduction of NHI, weighing the implications for their financial portfolios and long-term wealth accumulation strategies, to decide whether sticking around is worth it.

Middle-tier taxpayers face delicate balancing act

Moving down the socio-economic ladder, middle-tier taxpayers – a diverse cohort made up of salaried professionals, small-business owners and aspiring entrepreneurs – are confronted with some of the highest effective personal income tax (PIT) burdens in the world.

For this demographic, the budget speech represents a delicate balancing act between growth aspirations and the realities of fiscal constraints and economic uncertainty. Unlike top-tier earners, those in the middle typically lack not only a savings safety net, but also the resources to legally structure their affairs in the most tax-efficient manner, leaving them much more susceptible to the direct impacts of budgetary decisions.

While top-tier taxpayers are not as negatively affected by bracket creep on a percentage basis, middle- and lower-tier taxpayers should keep a keen eye out for the possible effect of an annual salary increase on their tax rate and their take-home pay.

Unfortunately, as mentioned above, this year, the government has not insulated any taxpayers from the effect of inflation on the PIT that they pay.

Further impact will be felt from the increase in so-called “rats and mice taxes”. These are taxes on items such as plastic bags, light bulbs, and sin taxes. If we add up all these indirect taxes and then calculate the amount per rand that earners will be paying, and compare this with what these earners were paying in 2023, the difference will be surprising.

With PIT as a proportion of total revenue collected increasing by 2% in 2024 compared to 2023, and with around 5% of the population paying around 92% of PIT, the ripple effects will be a reduction in spend from these earners because they are going to have substantially fewer rands in their pockets.

Essentially the economy will continue to be moribund, with the middle-tier left with even less spending money.

Lower-tier taxpayers are most vulnerable

The move to provide no relief to lower-tier earners was a surprising one, particularly in an election year. Inflationary – and in tough years, even below-inflationary – adjustments were normally provided for these individuals, which also indirectly affects their dependants.

Unlike their wealthier fellow citizens, bottom-tier taxpayers have very little financial resilience or buffers to cushion the economic blows of increased taxes, leaving them disproportionately vulnerable to the effects of budgetary decisions.

What about those not earning enough to pay income tax?

For millions of South Africans living on the margins of society, social grants have unfortunately not been increased by as much as inflation. South Africa has one of the world’s most expansive social grant systems: 47% of the population relies on a monthly grant, and the impact of lower increases is expected to place a further burden on this demographic who are already grappling with poverty, unemployment, and socio-economic exclusion.

Perhaps here one finds the most unsuspecting victim of bracket creep: an individual who previously fell below the PIT thresholds, but after an annual salary increase finds themselves unexpectedly in the company of the personal income taxpayers.

Was this bracket creep necessary?

The R16.3 billion extra that will be extracted in PIT for 2024/2025, and the knock-on effects thereof – which will be R17.3 billion in 2025/2026 and R18.6 billion in 2026/2027 – seems a drop in the ocean when considering a R1.8 trillion budget.

Was this increase necessary at all, especially considering that households are under immense pressure, and the country’s income tax burden is one of the highest among middle-income earners in the world?

Was there an alternative to taking that revenue, and instead, providing full inflationary income tax relief that would have yielded more positive results for the economy as a whole?

This post was based on a press release issued on behalf of BDO South Africa.