Personal income tax: This is what you’ll pay

National Treasury has proposed the introduction of a new top personal income tax rate of 45% for individuals with taxable incomes above R1.5 million.

It is estimated that 1.4% or roughly 103 300 registered taxpaying individual taxpayers will fall into this category during the 2017/18 tax year accounting for about 26% of the overall income tax payable. The previous top bracket of 41% was set at R701 301.

Finance minister Pravin Gordhan steered clear of a VAT rate hike during his 2017 Budget Speech, with R16.5 billion of the additional tax revenue of R28 billion coming from the new super tax bracket (R4.4 billion) as well as granting only partial relief for bracket creep (R12.1 billion). Bracket creep is the increased real tax liability that arises when personal income tax tables are not fully adjusted to account for inflationary increases in wages.

Nazmeera Moola, economist at Investec Asset Management, added that while there will be a lot of discussion around the new 45% tax bracket for those earning over R1.5 million a year, the bigger income tax story is the lack of any relief for inflation. In other words, tax brackets were not adjusted and so people will, in real terms, be paying more tax on the same income.

“If there had been full provision for inflation in terms of bracket creep relief, the total impact would have been R14.5 billion,” she noted. “But what we’ve actually been provided with is only R2.5 billion. The R12 billion difference is effectively a real tax.”

An increase in the dividend withholding tax rate from 15% to 20% is estimated to yield another R6.8 billion. Tax revenue collections have underperformed and are estimated to grow by 7% in 2016/17 compared with 9.8% projected in the 2016 Budget.

“Robust revenue collection depends on strong economic growth and effective tax administration,” Treasury said.

The table below sets out the adjustments to personal income taxes.

“The tax-free threshold will increase from R75 000 to R75 750. However, since the increase is below the expected level of inflation, taxpayers will face a real increase in the effective personal income tax rate in 2017/18. This also requires a four percentage point increase in the tax rate for trusts,” National Treasury said.

To counter the impact of effective personal income tax rate increases, Gordhan provided relief in the affordable housing market through an increase in the threshold above which transfer duty is paid from R750 000 to R900 000.

The annual allowance for tax-free savings accounts will be increased from R30 000 to R33 000 per annum.

While the minister indicated that the medical tax credit would be increased in line with inflation, he noted that consideration is being given to possible reductions in this subsidy in future, as part of the financing framework for National Health Insurance. The credit for the first two beneficiaries will be increased from R286 to R303 per month and for the remaining beneficiaries from R192 to R204 per month.

The table below highlights the relatively small tax base and the skewed nature of income distribution in South Africa.

National Treasury kept its GDP growth expectations unchanged at 1.3% for 2017 rising marginally to 2% and 2.2% in 2018 and 2019 respectively.

“Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage,” Gordhan said.

To read Pravin Gordhan’s full budget speech, please click here.

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