Income tax bracket creep may squeeze you

You may be feeling relieved that, according to the Budget released this week, income tax rates have not increased. But the brackets in the 2016/17 tax table have not risen in line with inflation, so you may pay more tax in real terms, writes Mark Bechard.

No increase in personal income tax rates was announced in the Budget, but you will pay more tax in the 2016/17 tax year, because inflationlinked salary and wage increases will result in your income being taxed at a higher effective rate.

In a progressive tax system (where the rate of tax increases as the taxable amount increases), wages and salaries are more highly taxed as they rise each year, even though they have not increased in real (after-inflation) terms. A way of ensuring that the purchasing power of your money remains the same from one tax year to the next is to adjust the income-tax brackets and the rebates to account for inflation. This is known as fiscal-drag relief.

Karin Muller, the head of Growth Market Solutions at Sanlam, says that, over the past three tax years, the income-tax brackets and the rebates have been adjusted more or less in line with inflation, but this will not be the case in the tax year that starts on March 1.

The government would have had to set aside R13.1 billion to provide full fiscal-drag relief in 2016/17, but, because it needs to raise an additional R18 billion in revenue, relief has been limited to R5.5 billion, leaving you, the taxpayer, to cough up R7.6 billion.

The fiscal-drag relief in 2016/17 is limited to: breached six percent in January.

You also need to factor in that increases in levies, such as the fuel levy, will reduce your disposable income, or spending power.

Even if you stay in the same tax bracket, if your wage or salary increased this year, you will pay more income tax, because your income will be taxed at a higher effective rate.

Ricardo Teixeira, the chief operating officer of BDO Wealth Advisers, provides examples of how fiscal drag will affect taxpayers in 2016/17, assuming their salaries increase by six percent (see table below left). The table also shows how much more tax they are paying now compared with 2011/12.

Mike Teuchert, the national head of taxation services at Mazars, says the higher your taxable income, the more you will feel the impact of fiscal drag. For example, if you earn R143 500 and your salary increases by six percent in 2016/17, you will get R8 610 more, but R1 307 of that will go to tax, leaving you with R7 303 – an after-tax increase of 4.74 percent. If you earn R543 500, you will get R32 610 more, but R10 654 will go to tax, which means your after- tax increase will be 4.04 percent.

The bottom line is: you will only really benefit from an increase in your take-home pay in 2016/17 if your salary or wage increase beats the inflation rate and it is high enough to compensate you for the additional tax you will pay on the higher earnings.

If your income did not increase this year, Muller says the adjustment in the primary rebate and the bottom three tax brackets will result you paying R731 a year less in tax if your taxable income is about R240 000 a year. If it is about R300 000, you will pay R1 206 less; if it is about R400 000, you will pay R1 546 less; and you will save R1 866 a year if your taxable income is R500 000 or more. However, these savings ignore the impact of inflation and increases in levies.

Teixeira says the inability of the government to provide more fiscaldrag relief is a result of the country’s poor economic growth, which has seen the government collecting less tax revenue.

The government derives 38 percent of its tax revenue from personal income tax, and, although National Treasury estimates that there will be 13.7 million registered taxpayers in 2016/17, only 7.1 million individuals will have a taxable income that exceeds the tax threshold. Without economic growth, the ability to collect additional revenue from existing taxpayers will be severely curtailed, Teixeira says.

According to National Treasury, 429 173 individuals – those with a taxable income of R750 001 or more – will pay 47 percent of the income tax collected in 2016/ 17. On the other hand, the 4 316 509 taxpayers whose taxable income is less than R250 000 a year will contribute only 10.5 percent.

The tax thresholds (the amount of taxable income at which you become liable for income tax) will be increased in 2016/17 from R73 650 to R75 000 for taxpayers below age 65, from R114 800 to R116 150 for taxpayers aged 65 to 74, and from R128 500 to R129 850 for taxpayers aged 75 and over.

The government has signalled that higher taxes can be expected next year. According to the Budget Review, the government needs to raise an additional R15 billion the 2017/18 and the 2017/18 tax years. It says the options to raise this revenue include limited relief for fiscal drag, increasing the income tax rates, introducing a new tax bracket, and increasing VAT and/or other taxes.