Figures of the week: South Africa’s personal income tax rate

On Wednesday, South Africa’s government released the national budget for the 2018 fiscal year. The government projects expenditures to amount to 1.56 trillion rand (R) ($121.16 billion) and the projected revenue to increase by 7 percent to R1.41 trillion ($109.51 billion). Finance Minister Pravin Gordhan announced that in order to fill the budget deficit, which amounts to 3.1 percent of GDP, taxes on the wealthy and taxes on particular goods (e.g., alcohol and tobacco) will be raised. Following the creation of a new tax bracket, South Africans earning more than 1.5 million rand ($116,574) will be subject to a 45 percent personal income tax (PIT) rate. The previous top bracket of 41 percent had been set at R701,301 ($54,498). The South African Treasury also discussed a hike in the value-added tax (VAT), but decided to abstain from making any significant change.

South Africa has the fourth-highest personal income tax rate in sub-Saharan Africa, followed by Chad (60 percent), Ivory Coast (60 percent), and Zimbabwe (50 percent). Contrary to the corporate income and value-added tax rates, the personal income tax is the only tax rate that has been modified in the last 5 years (Figure 1). In 2016, the PIT rate increased by 1 percentage point. The amount of tax revenue collected through the PIT increased by 10 percent between 2015 and 2016. For reference, the percentage increase between 2014 and 2015 was 13.8 percent, despite the lack of an increase in the tax rate.

Figure 1: South African tax rates, 2014-2018

Taxes collected through the personal income tax make up the largest share of South Africa’s tax revenue. This has been consistent throughout the last two decades (Figure 2). In 2000, notably, 43 percent of tax revenue was collected through the PIT. This percentage consistently declined until 2007, but increased after the 2008 financial crisis. The new tax rate is expected to affect 100,000 taxpayers, and will raise an extra R16.5 billion ($1.28 billion.)

Figure 2: South African tax revenue by main revenue source, as a percentage of total tax revenue