For the second year in a row, Treasury has left personal income tax brackets and rebates unchanged – effectively handing South Africans a stealth tax in this year’s budget. This bracket creep will squeeze earners and will be felt in the take-home pay of salaried workers, particularly those in the lower to middle-income bracket. The decision to leave personal income tax brackets and rebates the same in the 2025/26 tax year is a blow to taxpayers, squeezing lower to middle-income earners further, according to Rossouw.
“This lack of adjustment fuels bracket creep, also known as fiscal drag – a phenomenon where inflation-driven salary increases push earners into higher tax brackets, effectively raising their tax burden without an official rate hike,” explains Allan Gray’s head of Tax, Carla Rossouw.
In the previous budget – leaked in February and hotly contested, which ultimately resulted in the postponement of the budget speech – Treasury had proposed partial relief by adjusting lower tax brackets and rebates in line with inflation. “This was intended to offset the impact of the two-percentage-point VAT hike. However, in 2025/26, no such relief has been offered, meaning lower and middle-income earners will bear a heavier tax load.” Instead, a 0.5-percentage-point VAT increase over two years was proposed by Finance Minister Enoch Godongwana in his March Budget Speech, raising VAT to 16% by April next year. This was approved by a small majority in April 2025.
Bracket creeps means less spending power
Without inflationary adjustments, taxpayers may find themselves earning more but proportionately taking home less, as a greater portion of their increased income is swallowed by tax.
“For everyday taxpayers, it may seem like they’re earning more, but their real spending power declines. It has become a quiet lever used to increase revenue without officially raising tax rates.”
Indeed, many may feel that their salary increases are not really helping them pay the bills. Rossouw shares the below example, which highlights the impact of bracket creep:
Mr X’s income and tax for the tax year 2024/2025
Annual taxable income: R510 000
Income tax: R77 362 + 31% x (R510 000 – R370 500) = R120 607 – R17 235 (primary rebate) = R103 372
Income after tax: R510 000 – R103 372 = R406 628
Mr X’s income and tax for the tax year 2025/2026 if his income increases by 5%.
Annual taxable income: R535 500
Income tax: R121 475 + 36% x (R535 500 – R512 800) = R129 647 – R17 235 (primary rebate) = R112 412
Income after tax: R535 500 – R112 412 = R423 088
Although Mr X’s income has increased by 5%, his after-tax income only increased by 4.05%, which results in a monthly reduction in purchasing power. This means that Mr X will be able to buy less with his after-tax income than he is currently able to buy. The problem is exacerbated with the rebates (primary, secondary and tertiary) also not being adjusted for inflation.
How to keep saving and investing
There is no doubt this bracket creep will squeeze earners, and Rossouw actively encourages affected earners to adjust their financial plans. “Make sure you maximise your tax-efficient investments,” she suggests. “By contributing more to your retirement fund, for example, you can reduce your taxable income while growing your wealth, while tax-free investment accounts allow you to benefit from tax savings on your investment return.”
Another way to beat bracket creep is to strategically negotiate a salary increase that outpaces inflation and bracket creep. “Other options are to diversify your income streams by considering a side hustle or reducing unnecessary expenses,” she says.
Finally, Rossouw recommends working with an independent financial adviser to ensure your financial plan isn’t derailed. “Your IFA can devise tailored tax and investment strategies which can help mitigate bracket creep’s impact over time,” she concludes.
