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

24 February 2017 Richard Carter, Allan Gray
Richard Carter, head of product development at Allan Gray.

Richard Carter, head of product development at Allan Gray.

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 taxpayer,” says Richard Carter, head of product development at Allan Gray.

“While the increase in tax on the wealthy is the most eye-catching change, this will only impact around 100 000 tax payers. The real concern to me is that there has been little increase in tax brackets, leading to what is termed ‘bracket creep’,” he says. “This is much steeper than the numbers that are grabbing the headlines.”

Carter explains that 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.

“If you are 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.”

Turning to the increase in dividend withholding tax from 15% to 20%, Carter unpacks the rationale: “Dividend withholding tax was introduced in 2012 to replace secondary tax on companies. It affects the dividends portion of your investment’s 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 rates paid on each of these routes in balance.”

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

In terms of the other aspects of the Budget, Carter feels that 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,” he says.

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,” he cautions.

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

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