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Personal investing

Read beyond the Budget headlines: Bracket creep hits low to middle income earners

The 2017 Budget had some surprises, especially for the wealthy, with steep increases in income tax and dividend withholding tax. But the silent tax increase is the one to worry about.

The real loser from this Budget is the average South African tax payer. While the increase in tax on the wealthy is quite sensational, this will impact around 100 000 tax payers. The real concern is that there has been little increase in the tax brackets, leading to what we term as ‘bracket creep’. This is much steeper than the numbers that are grabbing the headlines.

Understanding ‘bracket creep’

With no increase in the tax brackets, if your salary goes up by inflation, but the tax brackets remain the same, you come out poorer.

As a normal salaried worker, your tax will go up by more than inflation if you move up the brackets, leaving you with less money to pay bills. This silent increase in tax is likely to raise more than three times more money than the tax on the wealthy.

Hike in dividend withholding tax

Turning to the rationale for the increase in dividend withholding tax from 15% to 20%: Dividend withholding tax was introduced in 2012 to replace secondary tax on companies. It affects the dividends portion of your investments overall return. It makes sense that it has gone up to keep in line with the increase in income tax, as if you own a company, you may pay yourself a dividend instead of a salary, and this keeps the balance. It prevents people from opening companies simply to avoid paying tax.

Retirement fund investors and investors in tax-free savings accounts products are not impacted by dividend withholding tax, but unit trust investors, and those investors who invest directly in the market, will receive lower after-tax returns.

Small increase in contribution limits for tax-free investments

In terms of the other aspects of the Budget, the increase in contribution limits for tax-free investments is a little disappointing.

When things are tight you need to budget carefully, but tax-free investments are encouraging more people to save, and the increase could have been more significant without having a big negative impact on the fiscus.

VAT: No increase for now but not off the table

It was a relief to many that the finance minister stayed away from VAT. In a struggling economy, to increase VAT, as well as not addressing bracket creep, would have been too much; it would have been a double whammy. But this does not mean that an increase is off the table.

Clearly it’s going to be a tougher year for most of us.

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