Middle class hardest hit by tax reforms
Middle-class consumers will bear the brunt of tax reforms announced in Wednesday’s budget, despite there being no increases to personal income taxes, say experts.
Following the first VAT increase in SA’s democratic history, consumers would pay more for all goods except the most basic food items, suggesting the middle class would be hardest hit, said PSG Konsult research head Ronald King.
The VAT increase would drive inflation higher, hitting the "average consumer’s" pocket the hardest, said Kwaku Koranteng of Absa Asset Consulting.
It would also increase the cost of saving and investment products, said Lance Solms, MD of iTransact. "Massive tax deductions are still available via retirement annuities and tax-free savings accounts," King said.
Announcing tax measures to raise an additional R36bn in the 2018-19 tax year, Finance Minister Malusi Gigaba unveiled a one percentage point increase in VAT to 15%. SA’s personal income tax burden has grown in recent years. A top-tier income tax rate of 45% for individuals earning above R1.5m, introduced last year, and limited compensation for "bracket creep" has hurt high-income earners. Bracket creep occurs when personal income tax tables are not adjusted for inflationary salary increases, raising effective tax rates and reducing real income.
Anyone earning above R423,000 a year would pay more tax, as they would receive no inflationary relief, said King.
Consumers will pay more for cars, following the five percentage point increase to 30% in excise duties on vehicles. The fuel levy was increased 52c/l, and taxes on alcohol and tobacco will rise 6%-10%.
Consumers should "take the breaks", making use of retirement annuities (RAs) and tax-free savings accounts, said Private Client Holdings’ Mark MacSymon.
With South Africans allowed to place as much as 27.5% of yearly earnings in RAs, claiming this as a tax deduction, these were "extremely tax-efficient savings vehicles", said Standard Bank Financial Consultants’ Errol Meyer.