Budget’s tax creep will get you, even if you’re not rich

Finance Minister Pravin Gordhan’s budget speech on Wednesday seemed mainly to target the wealthy with tax changes, but if you’re a middle-income earner, don’t think you’ve got off scot-free.

If your income is keeping pace with inflation, a larger portion of it will go to the taxman, and you’ll be hit by the higher fuel levy and higher “sin taxes”.

Gordhan and his team at National Treasury created a new tax bracket for people earning over R1.5 million a year. These individuals, whom Treasury estimates to number just over 103 000, or about 1.4 percent of registered taxpayers, will be subject to a marginal rate of 45 percent, compared with the current 41 percent, and this will bring in about R4 billion extra for the government.

However, Nazmeera Moola, the co-head of fixed income at Investec Asset Management, says that by far the biggest contribution to the government’s coffers ( about R12 billion) will come from the limited adjustments for bracket creep, whereby the tax brackets lag inflation – also known as fiscal drag. “The upshot is that every single taxpayer is affected and paying the price of South Africa’s slow growth and inefficient expenditure.”

The brackets have been increased by only one percent, although the rates associated with each bracket remain the same. This means you will pay slightly less tax if your income remains constant, but you will pay more as a portion of your income if your income increases by, for example, the inflation rate of between six and seven percent.

Also increasing by only one percent, instead of keeping pace with inflation, are the primary, secondary and tertiary rebates, which increased to R13 635 (from R13 500), R7 479 (from R7 407) and R2 493 (from R2 466) respectively. Even pensioners, to whom the secondary (for people aged 65 and over) and tertiary (for those aged 75 and over) rebates apply, will be paying proportionately more if their pensions are inflation-linked.

The tax thresholds, below which you do not pay income tax, increased by one percent to R75 750 (from R75 000) for taxpayers under 65, R117 300 (from R116 150) for taxpayers aged between 65 and 75, and R131 150 (from R129 850) for taxpayers aged 75 and over.

Ricardo Teixeira, the chief operating officer for BDO Wealth Advisers and a Certified Financial Planner, provides examples of how fiscal drag will affect all taxpayers, not just those whose salary increases put them into a higher bracket (see “Income tax examples”, right).

LOWER- AND MIDDLE-INCOME

Siphamandla Mkhwanazi, the general consumer economist at Standard Bank, says that although the new tax bracket was specifically directed at high-income earners, the overall effect of this year’s tax changes will be felt across the board.

The increase of 30 cents a litre in the fuel levy and the nine-cent increase in the Road Accident Fund levy will have a substantial effect on lower- and mid-income earners, because they spend a relatively higher portion of their income on transport than the wealthy do (13 percent, on average, versus six percent for wealthy households).

Mkhwanazi says the drag on the tax brackets will disproportionately affect the middle-income group. “We estimate that bracket creep alone, on average, took away four percent of middle earners’ discretionary income (income left over after all necessities have been paid) in the 2016/17 tax year, and this is set to increase to an average of 10 percent in the 2017/18 tax year. The middle-income group drives mass consumption in South Africa, and therefore this will negatively affect