After the false start of 19 February, the 2025 Budget was tabled by Finance Minister Enoch Godongwana on 12 March. The main tax policy proposals announced include raising the value-added tax (VAT) rate by 0.5% in each of the next two years – which will bring VAT to 16% in 2026/2027 – accompanied by no inflationary adjustments to personal income tax brackets, rebates or medical tax credits. These measures will raise an estimated R28 billion in additional revenue in 2025/2026 and a further R14.5 billion in 2026/2027. Carla Rossouw unpacks some of the key takeouts of this Budget that tries to balance the books.
The 2025 Budget speech is finally over the line after the initial attempt came undone following disagreement among political parties over a controversial 2% VAT hike. The delay reflected both the determination of our young government of national unity (GNU) to do things differently, as well as its growing pains amid weak economic growth and simmering geopolitical tensions.
There are glimmers of hope, with the GNU improving business confidence and inflation, as well as interest rates coming down. However, National Treasury acknowledged that “this optimism needs to be translated into more determined action and measurable results, specifically in the form of higher economic growth and improved living standards”.
In a quandary
In a low-growth environment, striking a balance between revenue and government spending, with little wiggle room to significantly hike taxes, continues to be a tough task with inevitable trade-offs. While the available mechanisms to achieve stability in the country’s finances remain restricted (borrow more, raise taxes or limit government expenditure), tangible measures to prevent overborrowing and ensure efficient, essential spending have become pivotal.
Addressing the shortfall
The primary aim of the tax system is to raise sufficient revenue to pay for government expenditure. The government’s three main revenue drivers are personal income tax (PIT), corporate income tax (CIT) and VAT.
The government seems to have run out of levers to pull as it aims to introduce tax hikes without hindering economic growth. The Minister confessed that higher-than-expected increases in public service wages and rising debt-servicing costs have created a growing divergence between government spending and available resources, which must be funded through tax increases, reduced spending or reprioritisation. It was evident in the untabled Budget speech that the pressure was on to find new and alternative revenue streams, which led to the Minister (unsuccessfully) opting for a 2% VAT hike to fill the revenue gap.
The government seems to have run out of levers to pull as it aims to introduce tax hikes without hindering economic growth.
PIT has for some time been the largest source of revenue, yet it remains under pressure due to stagnant economic growth, a narrow tax base and the cost-of-living crisis squeezing South Africa's households. South Africa’s PIT rates rank among the highest in the world alongside France and Germany. It is therefore difficult to introduce significant tax hikes, as any increase in the PIT rates would increase the financial burden on households without a meaningful contribution to revenue collections and risk compromising tax compliance.
The tax thresholds, rebates and PIT brackets will not be adjusted upwards to account for inflation, unlike what we saw in the untabled Budget on 19 February. This means that, as a normal salaried worker, your tax will effectively go up by more than inflation if you move up the brackets, leaving you with less money to pay bills. This is commonly referred to as “bracket creep” and a “silent” revenue generator for the government, as it is not immediately evident to most taxpayers. 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. The PIT proposals are effective from 1 March 2025 and are expected to raise revenue of R19.5 billion. No changes to medical tax credits were proposed.
There was no change to the current 27% CIT rate, which is in line with the government’s intention to make South Africa’s tax system more attractive and competitive globally.
There was an acknowledgement by the Minister that “increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation and economic growth”.
VAT is a tax on spending. Low economic growth subdues consumer spending and leads to lower VAT collections. While it may be the most effective tool to raise revenue, it is politically and socially very difficult to do so in the current economic climate. The reality is that South Africa’s VAT rate is still below the international average of 20%, so there is theoretically room to increase it. Given the country’s stretched finances, without big cost cuts, the Minister had little choice but to increase VAT. To raise the revenue needed, the government proposes to increase the VAT rate by 0.5% in 2025/2026 (effective 1 May 2025), and by another 0.5% (effective 1 April 2026). The second proposed 0.5% VAT increase will be reconsidered should government spending reduce and further measures yield sufficient additional revenue.
To raise the revenue needed, the government proposes to increase the VAT rate by 0.5% in 2025/2026 (effective 1 May 2025), and by another 0.5% (effective 1 April 2026).
The VAT rate hike increases the cost of living for all households, but the zero rating of certain basic foods as well as an above-inflation increase in social grants does reduce the impact on lower-income households. Taking zero-rated goods into consideration, VAT becomes slightly progressive, that is, higher-income earners pay a slightly higher proportion of their income on VAT.
As has become the norm over the past few years, taxes on tobacco products and alcoholic beverages (so-called “sin taxes”) were increased (above inflation) to boost revenue. Sin taxes are soft targets and relatively easy levers to pull to generate additional revenue given that they are non-essential items; increases are seen as more acceptable than other categories.
The general fuel levy has remained unchanged for the past three years. Given the current economic environment, the Minister decided to leave it unchanged once again to provide some relief amid increasing fuel prices.
The dividend withholding tax (DWT) rate remains unchanged. South Africa’s current 20% DWT does not rank among the highest in the world, but an increase could negatively impact investments.
No adjustments to the capital gains tax (CGT) rate or annual exclusion were tabled. In 2016, the maximum effective CGT rate for individuals was increased from 13.7% to 16.4%. The effective rate then jumped to 18% in 2017 with the introduction of the 45% PIT bracket. But raising CGT doesn’t result in an immediate revenue injection (as government has to wait for taxpayers to sell property, investments, etc.), nor is it expected to raise significant amounts of revenue, which something like a VAT rate hike can achieve.
The tax-free savings account annual contribution rate of R36 000 and lifetime limit of R500 000 were not adjusted for inflation, which effectively erodes the tax benefit year-on-year.
Competing spending priorities
Government spending comprises a bloated public sector wage bill, an unsustainable debt burden (consuming 22 cents of every rand of revenue) and spending pressures associated with state-owned entities (specifically Eskom and Transnet). What is disappointing is that despite government spending rising rapidly, we have experienced no corresponding improvement in economic growth.
Instead of taking drastic measures to reduce the growing wage bill, the Minister opted to manage current wage costs by providing “certainty” for forthcoming budget-planning purposes. He noted that 2025 public service wage agreements would cover a three-year period, in contrast with recent contracts that have covered only one or two years. He committed to reducing staff headcount by offering early retirement incentives. Both of these measures will take time to yield results.
Sustainable economic growth cannot be achieved by accumulating excessive debt indefinitely. In 2024, the government considered a “fiscal anchor”, a binding rule that limits government spending, but the proposal was later abandoned over concerns that it could restrict Treasury’s ability to deliver on its core functions. The Budget review indicated that global experience with fiscal anchors points to “a focus on procedural reforms, rather than numerical limits, achieved through transparency and accountability”. A discussion document presenting options and trade-offs for potential longer-term anchors accompanied today’s Budget speech.
State‐owned entities remain distressed due to weak governance, financial pressure and ongoing operational challenges, with many continuing to operate at a loss and dependent on substantial government support. The Minister, however, kept a firm stance, with no new allocations for struggling state-owned entities – forcing them to stand on their own.
Although the Minister of Health is adamant that National Health Insurance (NHI) will go ahead, the future of the health system remains unclear given the scale of opposition and the uncertainty surrounding costing and funding. To strengthen public healthcare facilities and to prepare for NHI, an allocation has been assigned to the Department of Health, along with a proposed costing exercise to build more hospitals.
Social protection is a burning issue for many South Africans. The social relief of distress (SRD) grant, which was understood to be a temporary COVID-19 relief measure, was extended yet again to 1 March 2026, with an additional allocation of R35.2 billion. During the 2025 State of the Nation Address, President Cyril Ramaphosa noted that the SRD grant (an essential mechanism for alleviating extreme poverty) will act as a basis for the introduction of a sustainable form of income support for unemployed people, i.e. a universal basic income grant (BIG). The review of South Africa’s social security system, which has proceeded more slowly than anticipated, is expected to be completed by September 2025. However, Godongwana stated that if it became a permanent expenditure item, a revenue source would have to be found to fund it to ensure it doesn’t “crowd out” other spending.
Let’s bear in mind that South Africa’s biggest challenge is not necessarily its spending pressures but the lack of economic growth. Growth would alleviate unemployment and create capacity to service debt. While the economy has strengthened in response to the suspension of loadshedding since March 2024 (notwithstanding the recent bouts), the absence of faster growth, global headwinds and spending demands mean that South Africa’s tax revenue will remain under pressure, forcing Treasury to make tough trade-offs on where and how to spend funds.
SARS’s vision for the future
Treasury’s long-term tax policy strategy looks to increase tax revenue by broadening the tax base and tackling South Africa’s tax gap (the difference between what should be paid and what is actually paid). Current tax compliance levels in South Africa are increasing, which is attributable to SARS’s efforts to make it very uncomfortable and costly for non-compliant taxpayers. We have seen tangible results through aggressive and ongoing investment in the latest technology to source data and analyse taxpayer behaviour. To show continued support towards these efforts, an additional R3.5 billion has been allocated to SARS in the current financial year and an additional R4 billion over the medium term.
Policy reforms to supplement tax coffers
During 2024, two longer-term policy reforms came into effect: the two-pot retirement system and the global minimum tax.
Since the two-pot system was introduced in September last year, roughly 40% of pension fund members have made use of the withdrawal benefit. Tax collections from these withdrawals have reached R11.6 billion as at the end of February 2025 – more than double the 2024 Budget’s estimate of R5 billion. Although this “windfall” has alleviated revenue pressure in the near term, it is not a guaranteed source of long-term revenue. The savings component was initially funded by “seed” capital, subject to a maximum of R30 000 taken from existing retirement savings. This gave all existing members something to draw – subject to tax at their marginal tax rate. Given that only one-third of new contributions are allocated to the savings component as retirement members make contributions, savings components will take some time to replenish, and in the absence of sizeable withdrawals, there will be less tax.
A global minimum tax was introduced in 2024, aligning South Africa to international best practice. This is expected to boost revenue collections and reduce the incentive for large corporates to shift profits. The first taxes come due in 2026.
There is a continued focus on generating revenue from wealthy individuals. Despite rumours ahead of the Budget speech, there was no mention of a wealth tax as an alternative revenue source.
However, Treasury indicated that they are working with SARS to understand the levels of wealth that have been declared to SARS in considering a potential wealth tax for high-net-worth individuals. No final decision has yet been made on the proposal. Currently, individuals holding assets valued at R50 million or more are required to declare all their wealth to SARS as part of their annual tax return filing.
The Minister provided welcomed clarity on the proposed reform impacting the taxation of collective investment schemes following the Treasury’s publication of a discussion document in November last year. The government acknowledged the concerns raised by the industry and has confirmed that it does not intend to tax all unit trust returns as revenue – as per the fully tax-transparent proposal put forward. Consultations will continue in 2025.
Where to from here?
Balancing the country’s books has become increasingly difficult for the Minister of Finance, with the success of this Budget boiling down to how well the government can strike (and maintain) a balance between competing opportunities and spending demands. What is clear is that there is little room to make significant tax adjustments when the tax burden is already so high. Increasing tax rates is not a sustainable solution, especially when the economy is not growing. Today, the real loser is the average South African taxpayer. In a struggling economy, increasing VAT as well as not addressing bracket creep is a double whammy. There is no doubt that South Africans face tough times ahead.
Looking ahead, South Africa’s long-term prosperity depends on a firm commitment to the ongoing implementation of structural reforms (supported by infrastructure investment), coupled with a substantial reduction in the cost of public service and non-essential, inefficient services.