What happens when your tax brackets doesn’t keep up with inflation?
by Bertie Nel, Momentum Head of Financial Planning and Advice
No one wants to pay more tax than they need to, yet fiscal drag can quietly erode disposable income over time. Tax brackets are designed so higher earners pay more tax. However, during times of high inflation, fiscal drag occurs.
Like a ladder, each rung represents a different portion of your income. The first portion, up to the tax-free threshold, is not taxed. The next Rand you earn moves you to the rung of the ladder and so on, until you reach the highest bracket, where you pay the most tax.
However, when salary increases, intended to help income keep pace with rising living costs, instead push taxpayers into higher brackets because tax thresholds are not adjusted, fiscal drag increases the tax burden without improving purchasing power.
What to listen for in the National Budget Speech
There are two primary levers the government can use to provide relief, and taxpayers should listen closely for these during the upcoming National Budget Speech by Finance Minister Enoch Godongwana on 25 February 2026:
- Bracket adjustments: Ideally, income thresholds should be shifted upward in line with inflation.
- Tax rebates: These are direct deductions from the tax you owe.
Proactive financial planning
According to the Momentum/Unisa Household Finance Insights Report, financially literate individuals are more likely to optimise their tax planning. As part of this, proactive financial planning has become an essential tool to ensure salary increases and long-term goals are not quietly undermined. Acting as a tax-efficiency architect, a financial adviser helps you to make the most of any tax deduction you are eligible for.
While contributions to a retirement annuity (RA) are tax-deductible up to certain percentage of your annual income, tax-free savings accounts help protect future investment growth from more tax drag down the line.
By understanding how the National Budget impacts their take-home pay, South Africans can make more informed financial decisions. A builder and protector of your financial dreams, an accredited financial adviser is the best person to help you minimise tax shocks on your journey to financial success.
