Finance Minister Enoch Godongwana tabled the revised 2025 Budget on Wednesday, 12 March, presenting a more favourable outcome for South African taxpayers than the initial proposal. The original budget, scheduled for release on 19 February, would have placed a greater financial burden on taxpayers, particularly through a significant increase in value-added tax (VAT).
Key Takeaways
- The Revised Budget Reduces the Immediate Tax Burden: The original proposal to raise VAT to 17% was scrapped in favour of a phased increase, with VAT rising to 15.5% in 2025 and 16.0% in 2026. This adjustment, while still an increase, is a less severe financial shock for consumers.
- Personal Income Tax Brackets Remain Unchanged, Leading to Bracket Creep: While the initial budget proposed adjusting tax brackets to offer relief, the revised budget has left them unchanged from 2024/25. As salaries increase to keep up with inflation, more individuals will be pushed into higher tax brackets, effectively paying more in taxes despite no change in tax rates.
- Consumer Spending Habits Make VAT Hikes More Impactful: With most South Africans spending the majority of their income and having a negative savings rate, VAT increases have a significant financial impact. The revised budget, while better than the initial proposal, still places an increased burden on consumers, particularly low- and middle-income earners.
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Initial Budget Proposed Hefty VAT and Tax Bracket Adjustments
The initial 2025 Budget included a proposal to raise VAT from 15% to 17%, marking a two-percentage-point increase. This change would have led to a noticeable rise in the cost of goods and services across all sectors, placing additional financial strain on consumers.
While the original proposal also suggested increasing personal income tax brackets, which would have provided some relief by allowing taxpayers to earn more before moving into higher tax categories, the significant VAT increase was a major point of contention. Raising the tax brackets would have benefited individuals, as it would have meant a higher income threshold before reaching a higher tax rate. However, this adjustment would not have been enough to counteract the devastating effect of higher VAT, especially for low- and middle-income earners who already struggle to keep up with rising expenses.
However, opposition within the government led to a reconsideration of these tax changes. Many cabinet members strongly objected to the drastic VAT increase, arguing that instead of raising taxes, the government should prioritise cutting spending. This approach, they argued, would better support economic growth and reduce financial pressure on households. Some economists and political analysts warned that pushing through a sharp VAT hike could have resulted in decreased consumer spending, slower economic growth, and heightened social unrest.
Revised Budget Introduces Smaller VAT Increase and Maintains Current Tax Brackets
In response to these concerns, Godongwana presented a revised version of the budget that includes a more gradual VAT increase. Instead of an immediate jump to 17%, VAT will increase by 0.5 percentage points in 2025/26, bringing it to 15.5%. Another 0.5 percentage point increase is planned for 2026/27, which will raise VAT to 16.0%. While this compromise offers some relief, it still represents an increase that will eventually hit consumers. It also raises questions about whether further tax hikes will follow in subsequent years.
Despite this compromise, several political and economic groups remain opposed to any VAT increase and have vowed to challenge these adjustments. Opposition parties, trade unions, and consumer advocacy groups have condemned the VAT hike, warning that it will disproportionately affect lower-income households. Some have even threatened legal action or mass protests to prevent further tax burdens on the public.
One of the significant changes in the revised budget is the removal of the previously planned adjustments to personal income tax brackets. Since the VAT increase is lower than initially proposed, the government opted to leave tax brackets unchanged from the 2024/25 structure.
While this decision prevents a higher tax burden for some, it introduces a new financial challenge due to bracket creep. Bracket creep occurs when inflation-driven salary increases push individuals into higher tax brackets without an official adjustment to the tax thresholds. This results in higher effective taxation on income, reducing take-home pay over time.
Comparison of Initial and Revised Income Tax Brackets
Below is a comparison of the originally proposed income tax brackets versus the unchanged structure that remains in place following the revised budget:
Initial Proposed Changes to Income Tax Brackets
| Taxable Income (R) | Rate of Tax |
|---|---|
| 1 – 248,600 | 18% of taxable income |
| 248,601 – 388,400 | 44,748 + 26% of taxable income above 248,600 |
| 388,401 – 529,200 | 81,096 + 31% of taxable income above 388,400 |
| 529,201 – 694,500 | 124,744 + 36% of taxable income above 529,200 |
| 694,501 – 885,400 | 184,252 + 39% of taxable income above 694,500 |
| 885,401 – 1,875,100 | 258,703 + 41% of taxable income above 885,400 |
| 1,875,101 and above | 664,480 + 45% of taxable income above 1,875,100 |
Unchanged Tax Brackets in the Revised Budget
| Taxable Income (R) | Rate of Tax |
|---|---|
| 1 – 237,100 | 18% of taxable income |
| 237,101 – 370,500 | 42,678 + 26% of taxable income above 237,100 |
| 370,501 – 512,800 | 77,362 + 31% of taxable income above 370,500 |
| 512,801 – 673,000 | 121,475 + 36% of taxable income above 512,800 |
| 673,001 – 857,900 | 179,147 + 39% of taxable income above 673,000 |
| 857,901 – 1,817,000 | 251,258 + 41% of taxable income above 857,900 |
| 1,817,001 and above | 644,489 + 45% of taxable income above 1,817,000 |
How the Revised Budget Affects Taxpayers
An analysis conducted by BusinessTech compared the financial impact of both the initial and revised budget proposals on individual taxpayers.
Under the initial proposal, the VAT increase to 17% would have placed a heavier burden on consumers, but the adjustment of income tax brackets would have provided some relief by reducing the tax owed on earnings. In contrast, the revised budget’s smaller VAT increase to 15.5% lessens the impact on consumer spending. However, keeping income tax brackets unchanged adds pressure on salary earners, particularly those receiving inflation-based salary adjustments. This creates a hidden cost for many taxpayers, effectively increasing the government’s tax revenue without officially raising income tax rates.
Impact of Spending and Savings Patterns on VAT
To assess the effect of VAT changes, BusinessTech assumed that individuals spend their entire monthly income, meaning that all earnings are subject to VAT when purchasing goods and services. While this may seem unrealistic, research suggests it aligns with the financial habits of many South Africans.
A study by STANLIB, which examined household savings patterns from 2000 to 2019, found that the average household savings ratio in South Africa stood at -0.5%. This indicates that, on average, South African households not only save none of their income but also tend to spend slightly more than what they earn. With rising inflation, stagnant wages, and growing debt levels, this trend is likely to continue, making any VAT increase even more burdensome.
Which Budget Has the Smaller Tax Impact?
By comparing the total tax paid under both budget scenarios—including VAT and personal income tax—it becomes evident that the revised budget presents a less severe financial impact on taxpayers. The fact that many South Africans save very little of their earnings means that VAT increases have a more immediate and noticeable effect on their finances than adjustments to income tax brackets. While the revised budget is an improvement over the initial version, taxpayers are still being squeezed, whether through direct tax increases or indirect financial pressures caused by bracket creep and rising living costs.
Conclusion
The revised 2025 Budget offers some relief compared to the initial proposal, but it still comes with financial pressures for taxpayers. While a smaller VAT increase is preferable to the original plan, keeping income tax brackets unchanged means that many salary earners will feel the squeeze due to bracket creep. With South African households already struggling with high living costs and minimal savings, any increase in VAT is likely to be felt across the board. Although the revised budget is a step in the right direction, it does not eliminate concerns over rising tax burdens, and ongoing debates are expected as economic conditions evolve.
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