In an outcome that could not have been predicted, for the first time in 30 years of democracy, South Africa's budget speech was not presented by South Africa's Minister of Finance, Enoch Godongwana on 19 February 2025 as planned and instead the Speaker of the National Assembly informed the country that the budget speech would be postponed.
Ostensibly due to a proposed 2% increase in the value-added tax ("VAT") rate, the Government of National Unity ("GNU") could not agree on the budget, which is now tabled to take place on 12 March 2025. While South Africa's VAT rate is still relatively low compared to other developing countries, South African taxpayers are subject to one of the heaviest tax burdens in the world, with tax equalling almost 25% of South Africa's gross domestic product.
Since the last budget, the South African economy strengthened in response to, improved confidence following the formation of the GNU in June 2024, better-than-expected inflation outcomes and reduced borrowing costs. In terms of the budget review released on 19 February 2025, the revised tax revenue estimate for 2024/25 was revised downwards by R19.3 billion and the GNU's main focus is on higher economic growth and improved living standards.
This budget deficit can be attributed to slower import growth, as a result of a stable power supply which led to lower imports of energy-related components and weaker investment, which led to underperformance in import VAT collections. Fuel levy receipts also contracted amid falling demand and large diesel refund payments. National Treasury will look to impose measures to make up this deficit.
Personal income tax and marginal tax rates
Personal income tax collection grew at 13.1% over the first 10 months of 2024/25 compared with the same period in the prior year. This reflects the impact of tax policy measures announced in the 2024 budget review and larger-than-expected tax receipts from withdrawals once the two-pot retirement fund system reform came into effect on 1 September 2024. There is an improved outlook for employee compensation in 2025/26 which, alongside additional revenue still expected from two-pot savings component withdrawals, will support stronger personal income tax collections.
No significant announcements on an increase in personal income tax are likely to be made with the highest marginal tax rate for individual taxpayers remaining unchanged at 45%. However, in view of the fact that no adjustment was made to the personal income tax brackets in last year's budget, it is to be hoped that there will be a fiscal drag adjustment to counteract the impact of inflation on taxable income in the 2025 budget, however, this is unlikely to be the full inflation adjustment to allow for "bracket creep", especially for taxpayers in the higher tax brackets, and some of the additional tax required to be collected will be recovered through this process.
It is anticipated that primary, secondary and tertiary rebates will not be increased.
Wealth tax
SARS has collected information on high net worth individuals holding assets in excess of R50 million, which is under consideration by National Treasury to determine whether a wealth tax may be imposed on such individuals. The focus has been on South Africa's personal income tax system that taxes returns on wealth, including dividends, capital gains, interest, and rentals.
An increase in the maximum marginal personal income tax rate is unlikely to generate significant additional revenue and may result in the emigration of wealthy taxpayers, which would then have a negative effect on the tax base as a whole. There are also additional complexities associated with the imposition of a wealth tax, especially in the context of assets held in trusts.
It is anticipated that the outcome of National Treasury's analysis and an update on whether any additional wealth taxes may be imposed in the future will be announced in the 2025 budget.
While it seems unlikely that a separate wealth tax will be imposed, South Africans have in any event experienced an increased tax on their wealth. South Africa's highest marginal tax rate, while still lower than in developed first world economies, is very high compared to other developing countries. South Africans reach the top marginal tax rate with an income of R1.8 million per year, while in a country like the United Kingdom, an equivalent income of R3 million is taxed in the top bracket. As the tax thresholds were not adjusted for inflation in the previous budget, the so-called "bracket creep" was responsible for raising an additional R16 billion of revenue in 2024/25. Failure to adjust the brackets for inflation means that many South Africans who receive inflationary salary increases will be pushed into a higher tax bracket, paying relatively more tax without a tangible increase in their standard of living.
Similarly, there has been no increase to the R3.5 million abatement on estate duty since 2008; donations tax has been payable on amounts larger than R100 000 since 2008; taxes on luxury goods and excise taxes have seen above-inflationary increases and South Africa's maximum transfer duty rate of 13% is amongst the highest in the world.
Medical tax credits
The removal of medical tax credits has been considered for a couple of years and is often presented as a method to raise additional revenue to fund the National Health Insurance ("NHI") scheme. This removal of medical tax credits in the 2025 budget may be premature as it is anticipated that it will take a number of years before NHI is fully implemented, however, the NHI scheme will likely receive a budget allocation now that it has been promulgated into law.
Corporate income tax rate
During the 2022 budget, when it was announced that the corporate income tax rate was reduced from 28% to 27% for companies with tax years ended after 31 March 2023 (which reduction was coupled with the introduction of the limitation of the set off of balance of assessed losses brought forward from prior years of assessment), the Minister announced that this rate would continue to decline over time.
While companies continue to contribute to approximately 20% of total tax revenue, the third largest contributor to total tax revenue, it is unlikely that any downward changes in corporate income tax rates will be announced.
During 2024/25, a longer-term policy reform, in the form of the global minimum tax, came into effect. The global minimum tax is expected to increase the amount of corporate income tax collected over time by raising revenue and reducing the incentive for large firms to shift profits. It requires large domestic and foreign multinationals operating in South Africa, as well as South African multinationals in other jurisdictions, to pay more corporate income tax to SARS from 2026/27 if their effective tax rate is below 15%.
South Africa's energy crisis
South Africa had more than 300 days free of loadshedding during 2024. The stabilisation of electricity supply has improved the overall investment climate and economic outlook for South Africa, although it has been conceded that the system is still vulnerable.
The permanent renewable energy tax incentive and the enhanced renewable energy tax incentive have been largely successful in reducing reliance on the grid for businesses who could afford the installation of the renewable energy facilities. The enhanced renewable energy incentive for businesses comes to an end on 28 February 2025 and it is unlikely that this incentive will be extended. However, the permanent renewable energy tax incentive may be extended to green hydrogen production.
Value-added tax (VAT)
The Minister of Finance's proposals in respect of VAT are arguably the most anticipated agenda point in the 2025 budget following an announcement that the VAT rate was initially proposed to be increased by two percentage points to 17% with effect from 1 April 2025. As a result of the backlash received, it is unlikely that the VAT rate will increase to more than 15,5% with an implementation date of 1 June 2025.
While an increase in the VAT rate may provide short-term government revenue to assist in addressing the budget deficit, it could negatively impact overall economic growth and would disproportionally affect lower income households. To mitigate the impact of this increase on households, the basket of VAT zero-rated foodstuffs should be expanded. Currently only 21 essential food items are zero-rated, but it is expected that the basket of essential food items that are zero-rated will be expanded to support poor South Africans amid rising food prices. The expanded list is likely to include dairy liquid blends, tinned and bottled vegetables and a variety of meats.
Excise
Customs duty collections grew moderately compared to prior periods, but are expected to fall short of 2024 budget estimates in line with weaker import growth.
All excise rates, for beer, alcohol and tobacco will increase, possibly above core inflation.
Several taxpayers have raised concerns regarding the timing of excise rate adjustments and the administrative burden and compliance complexities it creates. The current system is such that the excise duty rate adjustments are effective from 14h00 on the day of the Budget as the Minister of Finance makes the Budget Speech.
Before that time, taxpayers who are required to implement and comply with the rate adjustments do not know the exact level of adjustment in excise rates prior to the announcement. Taxpayers are also expected to keep two sets of records for the month of February to account for before and after the rate adjustment.
To address these challenges, an implementation date of 1 April 2025 excise duty rates adjustments will be announced.
Fuel levy and road accident fund
Net fuel levy collections contracted compared to the same period in 2023/24 as a consequence of a sharp decline in the demand for fuel.
Inflationary increases are still expected as the fuel levy remains a significant contributor to revenue collected and is easy to collect, especially as consumers are already accustomed to high fuel prices.
SRD grant
The social relief of distress ("SRD") grant is expected to come to an end in March 2025, but given that it has consistently been extended since the end of the pandemic, it is likely that this cut-off will again be extended.
In the 2024 budget, National Treasury also planned for budgetary spending in 2026 and 2027 to account for further extensions to the grant. The SRD grant was allocated R33.6 billion in 2024/25 during the 2024 budget, with provisional allocations of R35.2 billion and R36.8 billion for the 2025/26 and 2026/27 financial years.
Carbon tax
National Treasury released a Discussion Paper on Phase Two of the South African Carbon Tax for public comment on 13 November 2024. The Discussion Paper sets out the proposed changes to the tax-free allowances to be phased in between 2026 and 2035. The Discussion Paper proposes reductions in the maximum tax-free allowances from 2026 to 2035 but the carbon tax rate, which will increase from its current rate of R236 per tonne of carbon dioxide equivalent to R462 in 2030, remains constant at R462 for the period 2031 to 2035. As a result, the increases in the effective carbon tax rates from 2031 to 2035 are understated.
A stakeholder consultation workshop was held on 16 January 2025 to discuss the comments on the Discussion Paper. After considering stakeholder comments, the main proposals for the carbon tax in the 2025 budget review are to:
- extend the section 12L energy-efficiency tax incentive for five years to 31 December 2030;
- extend the commitment to electricity price neutrality to 31 December 2030;
- increase the carbon offset allowance by 5 percentage points from 1 January 2026; and
- maintain the basic tax-free allowance until 31 December 2030.
Two-pot retirement system
SARS has approved over 2.4 million applications for tax directives for withdrawals from the savings component of retirement funds in terms of the two-pot system since September 2024 and a total gross lump sum of over R43 billion was paid out by the end of January. As tax is imposed on the withdrawals at a marginal tax rate ranging between 18% and 45%, the introduction of the two-pot retirement system has contributed significantly to revenue collections in 2024/25 as total revenue from savings withdrawal benefits is expected to be between R11 billion and R12 billion. This is compared with the 2024 Budget estimate that R5 billion was likely to be raised in 2024/25 due to tax collected as fund members accessed once-off withdrawals. However, since there was an initial once-off injection of "seed capital" into members' savings component of their retirement funds in September 2024, the tax collected from savings withdrawal benefits may well be lower in subsequent years. It is unlikely that any changes to this regime will be announced.
Taxation of alcoholic beverages
Tax on sugar, carbon, tobacco, and alcoholic beverages will be adjusted upwards as has become the norm.
National Treasury has also proposed increasing taxes on alcohol to curb excessive consumption by making alcohol unaffordable to some. This is unlikely to be effective and could increase the black market, exposing South African consumers to buying alcohol that does not meet regulations. On this basis, it is unlikely that these taxes will be implemented.
Streaming tax
National Treasury is exploring several alternative funding mechanisms to modernise the South African Broadcasting Corporation's funding, in the context of the current TV licence system's failure to collect adequate revenue due to low compliance rates, high collection costs and inflation. A potential measure would include a levy on local and international streaming services.
Given that the levy would increase consumers' subscription costs and add an additional burden to already overburdened households, it is unlikely to be implemented.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
