No increase in personal income tax rates was announced in the Budget, but you will pay more tax in the 2016/17 tax year, because inflation-linked salary and wage increases will result in your income being taxed at a higher effective rate.
In a progressive tax system (where the rate of tax increases as the taxable amount increases), wages and salaries are more highly taxed as they rise each year, even though they have not increased in real (after-inflation) terms. A way of ensuring that the purchasing power of your money remains the same from one tax year to the next is to adjust the income-tax brackets and the rebates to account for inflation. This is known as fiscal-drag relief.
Karin Muller, the head of Growth Market Solutions at Sanlam, says that, over the past three tax years, the income-tax brackets and the rebates have been adjusted more or less in line with inflation, but this will not be the case in the tax year that starts on March 1.
The government would have had to set aside R13.1 billion to provide full fiscal-drag relief in 2016/17, but, because it needs to raise an additional R18 billion in revenue, relief has been limited to R5.5 billion, leaving you, the taxpayer, to cough up R7.6 billion.
The fiscal-drag relief in 2016/17 is limited to:
* Increasing the primary rebate (all taxpayers under the age of 65 qualify for this rebate) by R243 (or 1.8 percent), from R13 257 to R13 500. Neither the secondary rebate (for taxpayers over 65) of R7 407 nor the tertiary rebate (taxpayers over 75) of R2 466 will increase in the new tax year.
* Adjusting the bottom three tax brackets by about 3.2 percent. The threshold at which taxpayers will move from the lowest tax rate of 18 percent to being taxed at 26 percent will increase by R6 100, from R181 901 to R188 001. The threshold at which taxpayers move to a rate of 31 percent will increase by R9 500, from R284 101 to R293 601, and the threshold at which the 36-percent rate kicks in will increase by R13 200, from R393 201 to R406 401.
The top two tax brackets have not been adjusted. The tax rate of 39 percent starts at R550 101, while the threshold for the 41-percent rate remains R701 301.
If your taxable income in 2015 was close to one of the thresholds, an inflation-related pay increase this year could have pushed you into a higher bracket – this is called bracket creep, and the result is that the purchasing power of your money decreases.
The average inflation rate in 2015 was 5.2 percent, and inflation breached six percent in January.
You also need to factor in that increases in levies, such as the fuel levy, will reduce your disposable income, or spending power.
Even if you stay in the same tax bracket, if your wage or salary increased this year, you will pay more income tax, because your income will be taxed at a higher effective rate.
Ricardo Teixeira, the chief operating officer of BDO Wealth Advisers, provides examples of how fiscal drag will affect taxpayers in 2016/17, assuming their salaries increase by six percent (see link at the end of this article). The table also shows how much more tax they are paying now compared with 2011/12.
Mike Teuchert, the national head of taxation services at Mazars, says the higher your taxable income, the more you will feel the impact of fiscal drag. For example, if you earn R143 500 and your salary increases by six percent in 2016/17, you will get R8 610 more, but R1 307 of that will go to tax, leaving you with R7 303 – an after-tax increase of 4.74 percent. If you earn R543 500, you will get R32 610 more, but R10 654 will go to tax, which means your after-tax increase will be 4.04 percent.
The bottom line is: you will only really benefit from an increase in your take-home pay in 2016/17 if your salary or wage increase beats the inflation rate and it is high enough to compensate you for the additional tax you will pay on the higher earnings.
If your income did not increase this year, Muller says the adjustment in the primary rebate and the bottom three tax brackets will result you paying R731 a year less in tax if your taxable income is about R240 000 a year. If it is about R300 000, you will pay R1 206 less; if it is about R400 000, you will pay R1 546 less; and you will save R1 866 a year if your taxable income is R500 000 or more. However, these savings ignore the impact of inflation and increases in levies.
Teixeira says the inability of the government to provide more fiscal-drag relief is a result of the country’s poor economic growth, which has seen the government collecting less tax revenue.
The government derives 38 percent of its tax revenue from personal income tax, and, although National Treasury estimates that there will be 13.7 million registered taxpayers in 2016/17, only 7.1 million individuals will have a taxable income that exceeds the tax threshold. Without economic growth, the ability to collect additional revenue from existing taxpayers will be severely curtailed, Teixeira says.
According to National Treasury, 429 173 individuals – those with a taxable income of R750 001 or more – will pay 47 percent of the income tax collected in 2016/17. On the other hand, the 4 316 509 taxpayers whose taxable income is less than R250 000 a year will contribute only 10.5 percent (see table – link at the end of this article).
The tax thresholds (the amount of taxable income at which you become liable for income tax) will be increased in 2016/17 from R73 650 to R75 000 for taxpayers below age 65, from R114 800 to R116 150 for taxpayers aged 65 to 74, and from R128 500 to R129 850 for taxpayers aged 75 and over.
The government has signalled that higher taxes can be expected next year. According to the Budget Review, the government needs to raise an additional R15 billion the 2017/18 and the 2017/18 tax years. It says the options to raise this revenue include limited relief for fiscal drag, increasing the income tax rates, introducing a new tax bracket, and increasing VAT and/or other taxes.
UNDERSTANDING MARGINAL AND EFFECTIVE TAX RATES
Your marginal tax rate is the percentage applied to your taxable income in each tax bracket for which you qualify. In essence, it is the percentage taken from your next rand of taxable income above a pre-defined threshold (see link to tables at the end of this article).
For example, if you earn between R293 601 and R406 400 in the 2016/17 tax year, the first R188 000 you earn is taxed at 18 percent, the amount between R188 001 and R293 600 is taxed at 26 percent, and the amount above R293 600 is taxed at 31 percent.
The South African Revenue Service has calculated by how much your income is taxed in each bracket, but the table doesn’t take into account the fact that the first R75 000 you earn is not taxed if you are under the age of 65. To take this into account, you need to work out your tax according to the table and then deduct the primary rebate. If you are older than 65, the amount on which you do not pay tax, and hence the rebates, is higher.
For example, the tax table shows 18 percent of R188 001 (the threshold at which your rate changes from 18 percent to 26 percent) is R33 840; in the third tax band, R61 296 is the result of (R293 600 – R188 001) x 26 percent plus R33 840; in the fourth band, R92 264 is the result of (R550 100 – R406 401) x 31 percent plus R61 296. As the example indicates, your taxable income is not taxed at the same rate – in other words, if your taxable income qualifies for a marginal tax rate of 31 percent, it doesn’t mean you pay 31 cents in every rand you earn, but 31 cents on every rand you earn above R293 601.
To determine how many cents in every rand of your income you pay as tax, you need to work out your effective tax rate. This you can calculate by taking the amount of tax you pay and dividing it by your taxable income. Your effective rate will always be lower than your marginal tax rate.
You should not confuse your gross income and your taxable income.
* Gross income: the income you receive from all sources, such as your salary (or pension), commission and investments (excluding capital gains).
* Taxable income: your gross income less what is exempt from tax (for example, returns on money in a tax-free savings account) and less any amounts you can claim as deductions (for example, contributions to retirement funds). The result is your taxable income, to which you must add taxable capital gains and taxable business allowances (for example, a travel allowance). The tax payable on this amount is reduced by the rebates and the medical tax credits.