Finance Minister Trevor Manuel again gave taxpayers a personal income tax cut, but the experts say the move was largely to counteract the effect of inflation on your income and, as a result, the tax you pay.
Manuel announced a R4 billion cut in personal income tax, with the most relief for with lower-income earners.
The tax cuts have been achieved in two ways:
- The amount of money you need to earn before you start paying tax - what is known as the tax threshold - has been increased; and
- The amounts you need to earn before you start paying tax at higher rates - what are known as the tax brackets - have been increased.
Although these measures are likely to benefit all taxpayers, the minister says 60 percent of the relief will go to people who earn less than R150 000 a year (about R12 500 a month if you don't earn any bonuses).
Manuel has increased the amount of money you need to earn before you start paying tax from R30 000 to R32 222 a year. This not only means that more people who earn very low incomes will pay no tax at all, but also that everyone who earns more than R32 222 will pay at least R400 less tax.
The fact that you do not pay tax on the first R32 222 you earn is taken into account by way of what is known as the primary rebate, which you deduct from the amount of tax you calculate. This has been calculated for you already, and the difference between last year's rebate (R5 400) and this year's rebate (R5 800) is R400.
For taxpayers who are 65 years and older, the amount of money you need to earn before you start paying tax has been increased. From next month, people in this age bracket will need to earn more than R50 000 a year (up from R47 222 last year) before they start paying tax. This translates into a primary rebate of R5 800 plus what is known as the secondary rebate of R3 200 (up from R3 100 last year).
Manuel's adjustments to the tax brackets also favour lower-income earners, particularly those in the middle tax brackets.
South Africa has what are known as marginal tax rates. This means that all taxpayers pay the same tax on income up to a certain amount, and a higher rate of tax on income above that amount but below the next limit, and so on. In other words, as you earn more, you pay more tax. But an increase in income will not put you in the position where you have less after-tax money than was the case before you received the increase.
There are six tax brackets. Manuel has kept the tax rates the same for the six brackets, but he has increased the tax bracket limits.
See table How Manuel has trimmed high personal income taxes
For example, taxpayers earning less than R74 000 a year will pay the lowest tax rate of 18 percent on whatever amount they receive over the first R32 222 they earn.
Last year, this tax bracket applied to people earning R70 000 or less.
The second tax bracket now includes people who earn between R74 001 and R115 000 a year. They are taxed at 25 percent on the income they earn between these amounts. Last year, this bracket included people earning between R70 001 and R110 000.
In the top three brackets, the bracket range has shifted by R15 000.
For example, the top bracket now includes taxpayers who earn R270 001 and more a year, instead of R255 001 and more. The bracket that used to include people earning between R180 001 and R255 000 a year, now includes people earning between R195 001 and R270 000 a year.
Deborah Tickle, a tax partner at KPMG, says it appears the increases in the tax bracket limits serve largely to counteract the affect of inflation on salaries. When inflationary increases on your income push you into another tax bracket, it is known as fiscal drag or bracket creep.
But a Budget guide to the tax proposals, published by the South African Revenue Service, states the measures will increase real (after-inflation) disposable income.
This is true, but the real savings are small.
The income tax tables give examples of the tax reductions on certain taxable incomes.
People who earn R70 000 in taxable income a year, for example, will save R400 - a 5.5 percent reduction in the tax they were paying. People who earn R150 000 a year will save R1 430, a 4.8 percent reduction in their tax. Those on R500 000 a year save R2 430, but this represents only 1.45 percent of the tax they have been paying.
While the tax breaks this year are not nearly as generous as last year - when Manuel gave R13.3 billion back to taxpayers - at least one financial adviser says you should not lose sight of the big picture.
You may think a few hundred rands off your annual tax bill won't make a difference to your long-term financial well-being, Ian Beere of Netto Financial Services says, but you are "significantly better off today than you were five years ago".
"Depending on your tax bracket, your tax rate has almost halved," Beere says.
Manuel has kept his annual tax increase below the rate of inflation so that you have more money to spend in real terms today than you had in 2000, Beere says.
"Millionaires, pensioners and wage earners have all been given a huge gift by Manuel," he says.
He says someone earning R70 000 this year is now paying an effective rate of 10 percent, when they were paying an effective 17 percent in 2000. Taking inflation into account, the real (after-inflation) tax rate for these people has dropped by a staggering 43 percent.
"Millionaires coin it too, with a 14 percent reduction in their real tax rate compared to 2000," Beere says.
Beere says people who save through a retirement annuity, which has special tax breaks attached to it, can further reduce their tax - by up to 30 percent, for those who earn R70 000, or 16 percent for millionaires.
There were no changes to:
- The rate of capital gains tax you will pay on gains made after October 1, 2001 (an effective rate of, at the most, 10 percent).
- The amounts people must earn before they become provisional taxpayers (R10 000 for people under the age of 65 and R80 000 for the rest).
However, the Budget Review notes that the R10 000 threshold for the payment of provisional tax is not synchronised with other thresholds, such as that below which you pay no tax at all (now R32 222 a year). The result of this, the Budget Review says, is that some taxpayers have to file provisional tax returns, even though they do not earn enough to pay tax. Amendments to legislation are expected to correct this anomaly later this year.
- Donations tax (20 percent) or the amount you can donate tax-free each year (R30 000).
- Tax rates for trusts (40 percent).
- Deductions you can make for retirement fund contributions or medical and physical disabilities.