Take-home pay positive, but storm clouds gathering for tax payers

Take-home pay showed a year-on-year increase, continuing its upward movement in January as the high rate of inflation moderated, providing relief to salary earners. However, stormy clouds are on the horizon, particularly for tax-paying South Africans.

According to the BankservAfrica Take-home Pay Index (BTPI), the nominal average take-home pay was R15 670 in January, representing a 9.1% year-on-year increase although it was off a low base and showed a 1.5% growth on the R15 533 recorded in December, says Shergeran Naidoo, BankservAfrica’s head of stakeholder engagements.

Real take-home pay, the amount you receive after tax, insurance and other deductions, was also higher at R13 968 in January, a 3.5% year-on-year improvement, suggesting the significant erosion of the purchasing power of salary earners during 2023 is easing off.

“This essentially means that a salary increase could push salary earners into a higher income tax bracket. Affected individuals could end up paying tax at a higher rate and take home a lower salary than before the increase.”

This phenomenon, also known as ‘bracket creep’, will earn the government R16.3 billion more in taxes in the 2025 financial year. Kruger says government’s intention to maintain this as a medium-term policy, with revenue projections suggesting that bracket creep will stay for at least three years could take R52.2 billion from the pockets of tax-paying salary earners over this period.

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Risks for inflation to climb again that will affect take-home pay

Headline CPI moderated notably from 6.9% in January 2023 to 5.3% in January 2024 and fuel and food price inflation subsided notably during the past year. However, Kruger says a few upside risks appeared in the early weeks of 2024.

“The rand exchange rate started the year at R18.35/$ but depreciated in recent weeks to around R19.30/$, more than 5% weaker. This will surely be inflationary as all imports and globally priced products will increase sharply and add to the current under-recovery on fuel prices, which are already signalling a +R1 increase in both diesel and petrol prices in early March, with a likely second-round impact on general pricing in the economy.”

Kruger says add to these the negative impact of considerable medical aid premium increases in February and a scenario of headline CPI remaining elevated for some more months is likely.

Consumer inflation is expected to average around 5.3% in 2024 compared to 6.0% in 2023 after reaching 6.9% in 2022. Kruger says this is somewhat higher than consensus expectations of around 5.0%.

“A lower inflation rate, combined with some relief forecast on the level of interest rates, with interest rate cuts of 75 basis points pencilled in for 2024, could provide much-needed support to households’ spending ability and confidence levels. However, this could only surface in the second half of the year.”

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Economic challenges hampering companies’ ability to pay higher salaries

The BankservAfrica data confirmed that the ongoing economic challenges hampered companies’ ability to pay inflation-related salary increases in the past 18 to 24 months, she says.

“Significant increases in the operating cost environment, partly due to the impact of load shedding, but also global factors, have been among the main forces affecting companies’ profits.”

Although only mediocre economic growth of 1.3% is forecast for 2024, at least somewhat better than the estimated 0.6% recorded in 2023 and on the assumption of notably less load shedding in 2024, the business environment is expected to improve somewhat compared to the previous two years and as such, the labour market could also expect some upside, both in terms of wage settlements and job creation, says Kruger.

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Private pensions index still in positive territory

The BankservAfrica Private Pensions Index (BPPI) slipped marginally in both nominal and real terms in January 2024, but remained in positive territory on an annual basis.

“The nominal private pension fell slightly to R10 616 in January 2024 compared to the previous month’s R10 642, but it is still 5.7% higher than a year ago,” Naidoo says.

For the year 2023, the average private pension was R10 657 or 6.8% higher compared to a year ago, signalling that the purchasing power of pensioners represented in the BankservAfrica database has largely been preserved amid the still high inflation environment.

“Similarly, in real terms, the average BankservAfrica BPPI increased by 0.8% in 2023, keeping its recent inflation-beating record and this trend continued in January 2024,” Naidoo says.