Revised budget will take R28 billion from us in VAT and income tax bracket creep

Finance Minister Enoch Godongwana softened the initial VAT increase to a half-a-percentage point increase this year and half-a-percentage point next year when he presented the revised Budget proposals in parliament today.

But while the initial Budget proposals gave lower-earning taxpayers some relief from bracket creep, this was scrapped in the revised budget, which means all income taxpayers will find themselves paying higher average tax rates as well as more VAT on goods and services – in total R28 billion more the coming tax year.

The February proposal would have seen VAT increase from 15 percent to 17 percent raising R60 billion for government spending. The revised proposals will increase VAT to 15.5 percent on May 1 this year and to 16 percent on April 1 next year.

This VAT increase will suck an additional R13.5 billion in VAT from all South Africans in the coming tax year and a further R29.8 billion in the 2026/27 tax year, less amounts lost to zero-rated goods. 

Income earners pay more

The revised budget only trims government’s expenditure plans set out in the February budget, and big chunks of the hole created by reducing the VAT increase is filled with additional income tax from bracket creep, increased borrowing and taking from contingency reserves – the government’s emergency fund.

In the 2025/26 tax year, an additional R19.5 billion will be raised from taxpayers through bracket creep pushing up effective tax rates. This is in contrast to the February proposals to adjust the tax threshold and lower brackets for inflation which would have raised only an additional R3 billion in income tax.

There were no increases in the tax rates – the highest rate remains 45 percent for those earning more than R1.8 million, but the tax threshold (below which tax is not paid) and the tax brackets remain the same for the second consecutive year. Income tax in the year ahead will be paid by anyone earning over R95 750 (R7 979 a month) for under 65s.

The tax credits you enjoy for medical scheme membership for yourself and your dependants registered on your scheme were also not increased for inflation for a second year in a row, which the Budget Review shows will raise an additional R1.5 billion in tax.

This is despite the fact that medical scheme contributions have increased for 2025 at rates well above inflation – increases were between nine and 12 percent for most schemes. The tax credit for medical scheme members remains at R364 a month for the first two dependants and R246 for any dependants thereafter this year.  Read more: What is the medical tax credit?

When the tax brackets are not adjusted but your income increases with inflation, your average tax rate will increase as more of your income will fall into a higher tax bracket. The highest average tax rates are 33.2 percent for those earning more than R1.5 million a year and 35.5 percent for those earning more than R2 million a year. Read more: How do the income tax brackets work and what is my marginal tax rate? The new tax tables are available here: Tax tables

Mitigating the VAT increase

As there was in the abandoned February budget, there is R2 billion in relief for South Africans who consume goods that are zero-rated for VAT and there will be no adjustments to the fuel levy which will return R4 billion to consumers in the tax year ahead. 

As it did in February, the Budget Review proposes that the government will expand the list of 21 essential food items that currently do not attract VAT to include food items used particularly by low-income households. Read more: What is VAT?

The expanded list of zero-rated goods is expected to include edible offal, dairy liquid blends and tinned vegetables, although the final list will be debated when parliament deals with the tax bills.

However, the increase leaves households spending on all but basic food items facing higher costs for other foods, services such as healthcare, telecommunications, utilities and education in the year ahead.

Treasury’s Budget Review reveals that those earning more than R118 000 a year are contributing 75 percent of what is collected in VAT and can therefore be expected to pay most of the additional revenue the VAT increase will raise.

The VAT increase will fund increased infrastructure spending, the public sector wage bill, early childhood development, the retention of teachers, doctors and other essential workers, revitalise the commuter rail system and fund the above-inflation increases in the social grants.

Godongwana says this spending will benefit the poor and the budget should not be labelled as being one that will harm the poor. The delay of the budget highlighted the trade-offs that need to be made not only for the cabinet and government but for all of society.

Social grants increase by less

If you or a family member receive a grant for the aged, the disabled and for childcare dependency, these grants will increase between 5.7 percent and 5.9 percent, but not as much as Godongwana originally proposed in February.

The minister trimmed R5 billion off what he originally intended to spend on grants, saying the higher increases proposed in February were intended to offset a higher VAT increase.

The social old age grant and disability grant will increase as proposed in February by R130 a month (not R150 a month) in April from R2 185 to R2 315.

The war veterans grant will, however, increase by R140 to R2 335 as the minister proposed in February.

Child support and grant-in-aid grants increase by R30 to R560, instead of to R580 as initially proposed.

The social relief of distress grant will be extended for another year until March 2026.

More tax for smokers and drinkers

If you are a smoker or enjoy alcohol, your budget will also be hit by above-inflation increases in excise duties or sin taxes from March 12, the Budget reveals.  

Excise duties or sin taxes on alcohol or tobacco will increase by between 4.75 percent and 6.75 percent, raising an additional R1 billion, the Budget Review notes.

This is expected to add close to 16c to a 340ml can of beer, 29c to a litre of wine and R1.04 to a pack of 20 cigarettes with immediate effect.

Transfer duty relief

The thresholds at which transfer duty applies when you purchase property has been adjusted by 10 percent, according to the Budget Review. This means you can now buy property valued at up to R1 210 000 before transfer duty applies.

Transfer duty rates are then applied at between three percent and 13 percent of the value of the property, depending on the value of the property. The property values at which these apply have also been adjusted.