Bongani is 30 years old and currently earns R25 000 a month. The great news for Bongani is that he is due for an increase in a couple of weeks, and his salary will be bumped up to R27 500 a month. “Life couldn’t be better,” Bongani thinks, as he pulls out of the basement parking of the office. “I’m expecting an increase, but Tito mentioned no changes to the Income Tax brackets so that’s positive news!” That’s until Bongani picked up the paper the day after the budget speech and learnt about the ‘bracket creep’, or rather the lack of it.
Why worry about the “bracket creep”?
The Government basically has two ways to get more Income Tax out of us each year:
- Increase the tax brackets
For instance, last year the maximum marginal tax rate (the tax bracket for top earners) was increased from 41% to 45%.
- Don’t adjust the income tax brackets to allow for inflation
A great idea to raise taxes without the taxpayer ever knowing…unless they’re wise to it.
In the 2019 Budget speech last week, it was made crystal clear that there would be no changes to the Income Tax brackets for the next Tax year. Good news on the face of it, until you dig a little deeper.
Let’s compare two different tax years to show you what we mean:
Remember that the tax year ends in February every year. So, the 28th February 2019 marks the end of the 2019 tax year.
This is the tax table for this year and next year (February 2019 & February 2020) because there have been no changes to the income tax brackets.
|2019/2020 TAXABLE INCOME / YEAR||RATE OF TAX (RANDS)|
|R0 – R195 850||18% of taxable income|
|R195 851 – R305 850||R35 253 + 26% of taxable income above 195 850|
|R305 851 – R423 300||R63 853 + 31% of taxable income above 305 850|
|R423 301 – R555 600||R100 263 + 36% of taxable income above 423 300|
|R555 601 – R708 310||R147 891 + 39% of taxable income above 555 600|
|R708 311 – R1 500 000||R207 448 + 41% of taxable income above 708 310|
|R1 500 001 and above||R532 041 + 45% of taxable income above 1 500 000|
|2018 TAXABLE INCOME (RANDS)||RATE OF TAX (RANDS)|
|R0 – R189 880||18% of taxable income|
|R189 881 – R296 540||R34 178 + 26% of taxable income above 189 880|
|R296 541 – R410 460||R61 910 + 31% of taxable income above 296 540|
|R410 461 – R555 600||R97 225 + 36% of taxable income above 410 460|
|R555 601 – R708 310||R149 475 + 39% of taxable income above 555 600|
|R708 311 – R1 500 000||R209 032 + 41% of taxable income above 708 310|
|R1 500 001 and above||R533 625 + 45% of taxable income above 1 500 000|
Focus on the left-hand block. Notice how the income brackets have increased between 2018 and 2019. Take the first bracket for instance, and you’ll notice that the amount went from R189 880 to R195 850. This won’t be happening in this coming tax year.
Let’s start off in 2018 and only look at the first row. In other words, the R0 to R189 880 tax bracket.
- So, let’s say you earned R189 880 up to the end of February 2018 (R15 823 per month). You’d end up paying R34 178 in income tax.
- But who of us doesn’t expect a raise every year? Let’s say your company offered you a 5% increase from March 2018 (the start of the 2019 tax year), taking your annual income from R189 880 to R199 370 in the year ending February 2019. You’d end up paying R36 168.20 in tax.
- That means that you ended up paying R1990.20 more tax in the 2019 tax year.
Let’s get back to Bongani…
Bongani has been rewarded with an increase which means his income is jumping to R330 000 a year from the 1st March 2019.
Bongani is expecting to pay R62 332 in tax for the year ending February 2019, based on his current earnings of R25 000 per month or R300 000 per annum. R300 000 puts him squarely in the 26% tax bracket.
From March 2019 onwards, his annual income will jump to R330 000 which means he can expect to pay R71 339 in taxes. R330 000 puts him into the 31% tax bracket. He will pay a whopping R9007 more in tax.
Because there hasn’t been at least an inflation adjusted increase to the tax brackets this coming tax year, Bongani’s increase has landed him squarely in a new tax bracket.
While most South Africans might be welcoming the fact that there are no income tax bracket changes in the new tax year, it’s obvious that if you are expecting a salary increase, you might well be caught coughing up more as you jump up a rung on the tax bracket ladder.
In fact, the Government stands to gain an additional R12,8bn in extra income tax from this “fiscal drag” strategy, while painting a picture that they are doing South Africans a favour by leaving the tax brackets unchanged.
How fair is this?
Add the fuel hike and extra pain for our sins (Sin Tax) and suddenly it looks like it will be a long year ahead of us.
Expecting an increase during this next tax year? Feel free to use our tax tables above to work out what the impact will be on your pocket.
We would love to hear your comments on this.
Until next time.
The Wise About Life Team