No more headroom: 2025 Budget Speech is bad news for taxpayers

Source: Reuters.

When the parliamentary session finally commenced, many MPs voiced their frustration over the delay and the late start to the session, demanding accountability. Minister of Finance, Enoch Godongwana, faced the unenviable task of outlining the government’s plans for expenditure cuts, infrastructure development, and, most critically, new tax proposals.

Taxpayers carrying a heavier burden

The key concern for many was whether the Vat rate would be increased – a widely unpopular proposal that was rumoured to have caused the initial delay. The government has now proposed a 0.5% Vat increase in the 2025/26 fiscal year, followed by another 0.5% increase the following year.

While this move was anticipated, what has come as a shock is the decision to keep personal income tax brackets unchanged for the third consecutive year. With no adjustments for inflation, individual taxpayers will effectively pay more tax in real terms, leading to diminished purchasing power across the board. Adding to the dismay, a proposal to tax previously exempt foreign pension income is set to hit expatriates and returning retirees hard, explains Lobban. These measures raise serious concerns about fairness and economic impact, with little upside benefit foreseen.

General sentiment

Despite the overall bleak outlook, the Budget Review does contain some positive elements. Certain tax proposals provide increased legal clarity, while others offer modest relief in specific cases. Notable measures include the reinstatement of a tax exemption for child-maintenance payments funded from after-tax income and a tax deduction for foreign taxes incorrectly levied on employment income.

During his speech, the Minister stated, “We are aware of the fact that a lower overall tax burden can help to increase investment and job creation and also unlock household spending power.” However, the government’s proposed measures indicate that it has run out of financial headroom and sees no alternative but to increase the tax burden. Lobban advises, in essence, while the government acknowledges that lower taxes could stimulate economic growth, it simply cannot afford such a policy direction at this time.

Recognising the increasing financial strain on taxpayers, National Treasury has proposed granting full access to the two-pot retirement fund system in cases of retrenchment—a departure from the current restrictions. This signals a concerning acknowledgment of the economic struggles that businesses and employees are likely to face in the coming year. It is, by all accounts, a troubling forecast.

Sars: The one bright spot?

The only unequivocally positive announcement in this year’s Budget Speech was the increased budget allocation to the South African Revenue Service (Sars), says Lobban. Sars will receive R3.5bn in the current fiscal year, with an additional R4bn over the medium term.

While Sars may not be universally popular among taxpayers, a well-resourced revenue service is essential for both taxpayers and the country’s fiscal health. Improved enforcement could help address the chronic shortfalls in revenue collection. As Minister Godongwana noted, “rewards of higher tax compliance and efficiency take time. Once again, the investments we make today in Sars will allow the collector the time to make improvements.”

Nevertheless, for most taxpayers, immediate relief simply remains out of reach. Whether the situation improves or worsens over the medium term remains to be seen – assuming, of course, that the Medium-Term Budget Policy Statement proceeds as scheduled in October.