Carla Rossouw, head of tax at Allan Gray

As South Africans anticipate the upcoming Budget Speech, many will be watching closely for indications of tax increases.

But, according to Carla Rossouw, head of tax at Allan Gray, in recent years low economic growth has made spending cuts and legislated tax increases unfeasible. Instead, the Minister of Finance has opted to raise additional revenue by making little to no adjustments to the personal income tax brackets, leading to what is termed “bracket creep”. Bracket creep is a deliberate yet simple measure for National Treasury to collect more revenue in a way that is uncontested and largely unnoticed by most taxpayers.

“Stagnant tax tables may appear to be a reason to celebrate, but in fact have an impact on the average South African taxpayer’s take-home pay – especially when this persists over several years,” explains Rossouw.

She adds that while bracket creep is not new, the compounding effect over several years is significant.

Understanding bracket creep

Inflation-related salary increases are typically intended to preserve purchasing power. However, in a year of unchanged tax brackets, even a modest adjustment can push earners into a higher bracket. This means a disproportionate share of their increase is taxed away.

Rossouw explains: “Taxpayers often expect to move into higher tax brackets only when they are promoted and, as a result, receive a notable salary increase and/or performance bonus. But in reality, many are shifted upward simply due to inflation-linked increases. Without relief in the tax tables, an inflation adjustment can leave you poorer in real terms.”

An example: Mr X’s income and tax for the 2024/2025 tax year

Below, she uses an illustrative example to show how a 5% increase in income would result in an after-tax income having only increased by 4.05%, resulting in monthly loss of purchasing power of roughly R335 compared to a scenario where tax brackets had been adjusted for inflation. “When tax rebates are also left unchanged, the effect compounds,” says Rossouw.

Graph 1 illustrates the monthly reduction in purchasing power (y-axis) as determined by an investor’s tax bracket (x-axis).

Impact on the vulnerable

Rossouw says that despite South Africa having a progressive tax system in which the principle applies that those with greater resources should contribute more to public services and infrastructure, bracket creep has a disproportionate impact.

“The unfortunate reality is that bracket creep is experienced by low- to middle-income earners, who are more likely to be pushed into higher brackets,” she says. “In addition, many taxpayers who previously fell just below the tax threshold are now being pulled into the Pay As You Earn (PAYE) net for the first time.”

She explains that bracket creep widens the tax net, with more people shifted over the monetary threshold when PAYE becomes due and payable.

How to ease the impact of bracket creep

Rossouw says it may surprise taxpayers to learn that there are practical steps to take to lessen the impact of bracket creep:

• Don’t be caught off-guard. Understanding the impact of bracket creep and how it affects your after-tax income is the first step towards finding an appropriate solution.
• Adjust your financial plans. You can reduce your taxable income (while growing your wealth) by maximising contributions to tax-efficient investment vehicles, such as retirement funds. Contributions to tax-free investment accounts – while made with your after-tax income – allow you to benefit from tax savings on your investment return.
• Be mindful when negotiating salary increases. Annual adjustments that beat both inflation and the effects of bracket creep assist in retaining real purchasing power.

“It is important not to let unexpected tax increases impact financial goals. Consider consulting an independent financial adviser, who can assist in adapting your personal budget to accommodate the changes and devise tailored tax and investment strategies to help mitigate bracket creep’s impact over time,” concludes Rossouw.