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When British prime minister Margaret Thatcher came to power in the UK in the late 1970s, inflation had started rearing its ugly head.

The minister of finance, Geoffrey Howe, used the opportunity to balance his budget by offering limited relief for fiscal drag. Effectively, the government collected taxes by stealth, something that has become quite common in the tax world – and in South Africa.

When our finance minister Tito Mboweni took to the stage in Parliament for his first budget speech on Wednesday, it was widely expected that personal income tax rates would remain unchanged, but the announcement that tax brackets would not be adjusted for inflation at all came as a surprise. Treasury expects to raise R12.8 billion in tax revenue in this manner. Only marginal adjustments were made to rebates.

But what does this mean for taxpayers? While South Africa’s inflation rate is nowhere near that of the UK in the late 1970s (Treasury expects CPI of around 5.2% in 2019), government is raising money in a similar way. It means that even though the tax rate and brackets remain unchanged, an inflationary increase in your salary will increase your effective tax rate.

The impact is probably best explained by way of some examples. The table below follows three individuals below the age of 65 who earned R250 000, R500 000 and R1 million in 2014/15 respectively. We assume their income rose 6% every year. To keep the calculation simple, no tax deductions or credits were allowed. The numbers for 2015/16 are not displayed due to space constraints, but inflationary adjustments to salaries were considered during the year.

The tables below show how the government’s budget announcement would affect these fictitious individuals.

Person A: R250k in 2014/15

2016/17

2017/18

2018/19

2019/20

Annual income

R280 900.00

R297 754.00

R315 619.24

R334 556.39

Tax calculation

R57 994.00

R62 286.34

R66 881.46

R72 751.98

Primary rebate

(R13 500.00)

(R13 635.00)

(R14 067.00)

(R14 220.00)

Tax per annum

R44 494.00

R48 651.34

R52 814.46

R58 531.98

Effective tax rate

15.84%

16.34%

16.73%

17.5%

Tax per month

R3 707.83

R4 054.28

R4 401.21

R4 877.67

% increase

9.34%

8.56%

10.83%

 

Person B: R500k in 2014/15

R561 800.00

R595 508.00

R631 238.48

R669 112.79

Tax calculation

R152 559.00

R165 039.12

R177 390.01

R192 160.99

Primary rebate

(R13 500.00)

(R13 635.00)

(R14 067.00)

(R14 220.00)

Tax per annum

R139 059.00

R151 404.12

R163 323.01

R177 940.99

Effective tax rate

24.75%

25.42%

25.87%

26.59%

Tax per month

R11 588.25

R12 617.01

R13 610.25

R14 828.42

% increase

8.88%

7.87%

8.95%

 

Person C: R1m in 2014/15

R1 123 600.00

R1 191 016.00

R1 262 476.96

R1 338 225.58

Tax calculation

R380 107.00

R406 941.46

R434 656.45

R465 713.39

Primary rebate

(R13 500.00)

(R13 635.00)

(R14 067.00)

(R14 220.00)

Tax per annum

R366 607.00

R393 306.46

R420 589.45

R451 493.39

Effective tax rate

32.63%

33.02%

33.31%

33.74%

Tax per month

R30 550.58

R32 775.54

R35 049.12

R37 624.45

% increase

7.28%

6.94%

7.35%

All three taxpayers will see their effective tax rate rise between 2018/19 and 2019/20. However, the middle and upper-middle income earners (Person A & B) will see it rise more (0.77 and 0.72 percentage points respectively) than the high income earner (Person C), whose effective tax rate will rise 0.43 percentage points.