How so-called bracket creep adjustments will benefit consumers

2020-02-27 07:00 - Londiwe Buthelezi
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South Africans will breathe a sigh of relief after Finance Minister Tito Mboweni announced on Wednesday that there would be no increase in personal income tax or value-added tax. But how much more money will salary earners have in their pockets after this Budget, and will it be enough to get South Africa out of the doldrums?

Mboweni thinks it will. "Wage and salary earners had significant tax relief, which in some small way should boost the economy," said the minister during a media briefing on Wednesday.

Mboweni announced a 5.2% bracket creep adjustment in personal income tax (PIT) brackets, which is above the 4.5% inflation rate Treasury forecast for 2020. This means that the rand amount at which people start paying higher taxes will increase from March. 

The adjustment of the tax bracket to mitigate the impact of inflation, or so-called bracket creep, did not happen in 2019/20. Calculations done by economist Mike Schüssler at the time showed that taxpayers started paying taxes with R10 000 less income in 2019/20 compared to 2012/13. 

The adjustment announced by Mboweni on Wednesday means that people will start paying tax when they earn more than R83 100 a year, whereas PIT collection kicked when earning above R79 000 in 2019/20.

Salary earners in the lowest tax bracket of 18% will start moving to 26% when they earn more than R205 900 a year - R10 050 more than in the current period. High income earners will have to earn above R1 577 300 a year, or an additional R6 441 a month, to move to the highest tax bracket of 45%.

Lullu Krugel, chief economist at PwC, said while it was a surprise relief, consumers would remain under pressure given that private sector wage increases for 2020 were, on average, zero in real terms.

'Brave move'

"To be quite honest, I don't expect massive positive effect because consumers are playing catch-up. But what is very important is the fact that the minister realised that further tax increases will be bad for growth. It was a brave move…the minister was trying to be pro-growth in this budget,” said Krugel.

Another tax relief for households will come in the form of higher transfer duty exemption and increased medical tax credits. Currently, taxpayers do not pay any transfer duty when buying a house up R900 000. Going forward, they won’t pay the transfer duty for up to R1 million of the house value, a R100 000 increase in the exempted amount. The last time government adjusted this amount was in 2017.

Medical tax credits and contributions to tax-free savings accounts also increased, while foreign remuneration exemption for South Africans working abroad will increase to R1.25 million per year from 1 March.