After the false start of 19 February, Finance Minister Enoch Godongwana tabled the 2025 Budget on 12 March.
The main tax policy proposals include raising the Value Added Tax (VAT) rate by 0.5% in each of the next two years. This will bring VAT to 16% in 2026/2027. It will be accompanied by no inflationary adjustments to Personal Income Tax (PIT) brackets, rebates or medical tax credits. These measures will raise an estimated R28 billion in additional revenue in 2025/2026.
A further R14.5 billion will be raised in 2026/2027. There are some of the key takeaways from this 2025 Budget. As such, the 2025 Budget attempts to balance the books.
The 2025 GNU Budget’s delayed start
The 2025 Budget speech is finally over the line. The initial attempt came undone due to 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. It also showed its growing pains amid weak economic growth and simmering geopolitical tensions. There are glimmers of hope.
The GNU is improving business confidence and inflation. Interest rates are also coming down. However, National Treasury acknowledged that “this optimism needs to be translated into more determined action”. Measurable results are needed, specifically higher economic growth and improved living standards. In a low-growth environment, balancing revenue and government spending is a tough task.
There is little wiggle room to significantly hike taxes. Striking that balance comes with inevitable trade-offs. Available mechanisms to achieve financial stability remain restricted. These include borrowing more, raising taxes, or limiting government expenditure. Tangible measures to prevent overborrowing and ensure efficient spending have become pivotal.
Tax hikes and 2025 GNU budget concerns
The primary aim of the tax system is to raise sufficient revenue for government expenditure.
The government’s three main revenue drivers are:
- PIT
- Corporate income tax (CIT)
- VAT
The government seems to have run out of levers to pull. 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 are causing a divergence.
Government spending and available resources must be funded through tax increases, reduced spending, or reprioritisation. It was evident in the untabled 2025 GNU Budget speech that the pressure was on to find new revenue streams. This led to the minister (unsuccessfully) opting for a 2% VAT hike to fill the revenue gap.
Pressure on PIT
PIT has been the largest source of revenue for some time. However, it remains under pressure due to stagnant economic growth, a narrow tax base and the cost-of-living crisis.
South Africa’s PIT rates rank among the highest in the world. They are comparable to those of France and Germany. It is difficult to introduce significant tax hikes. Any increase in PIT rates would increase the financial burden on households. It would also risk compromising tax compliance.
The tax thresholds, rebates, and personal income tax brackets will not be adjusted upwards to account for inflation. This was unlike what we saw in the untabled 2025 GNU Budget on 19 February. This means that, as a salaried worker, your tax will effectively go up by more than inflation. If you move up the brackets, you will have less money to pay bills. This is commonly referred to as “bracket creep”. It is a “silent” revenue generator for the government. The increase is not immediately evident to most taxpayers.
With no increase in tax brackets, if your salary increases with inflation, but the brackets stay the same, you come out poorer. The PIT proposals will be effective from 1 March 2025. They are expected to raise revenue of R19.5 billion. No changes to medical tax credits were proposed.
CIT remains unchanged
There was no change to the current 27% CIT rate. This is in line with the government’s intention to make South Africa’s tax system more attractive. The government also wants to make it more competitive globally.
During the 2025 GNU Budget speech, the minister acknowledged that “increasing corporate or PIT rates would generate less revenue”. It could also harm investment, job creation and economic growth.
VAT as a revenue-generating tool
VAT is a tax on spending. Low economic growth subdues consumer spending, leading to lower VAT collections.
While VAT is effective at raising revenue, it is politically and socially difficult to increase in the current economic climate. The reality is that South Africa’s VAT rate is still below the international average of 20%. This means there is room to increase it. Given the country’s stretched finances, the Minister had little choice but to raise VAT. To raise the needed revenue, the government proposes to increase the VAT rate by 0.5% in 2025/2026. This will be effective from 1 May 2025.
Another 0.5% increase is proposed for 2026/2027. This second VAT increase will be reconsidered if government spending reduces and further measures yield sufficient revenue.
The VAT rate hike will increase the cost of living for all households. However, the zero rating of certain basic foods and an above-inflation increase in social grants will reduce the impact on lower-income households.
Taking zero-rated goods into consideration, VAT becomes slightly progressive. Higher-income earners pay a slightly higher proportion of their income in VAT.
Sin taxes and fuel levies
As has become the norm in recent years, taxes on tobacco products and alcoholic beverages were increased. These “sin taxes” were raised above inflation to boost revenue. Sin taxes are soft targets and easy levers to pull. They are seen as more acceptable than other tax increases.
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 relief amid rising fuel prices.
Dividend withholding Tax and Capital Gains Tax
The dividend withholding tax (DWT) rate remains unchanged. South Africa’s 20% DWT does not rank among the highest in the world. However, an increase could negatively impact investments.
No adjustments to the capital gains tax (CGT) rate or annual exclusion were proposed on the 2025 GNU budget. In 2016, the maximum effective CGT rate for individuals was increased from 13.7% to 16.4%. It then jumped to 18% in 2017 with the introduction of the 45% personal income tax bracket. But raising CGT doesn’t result in an immediate revenue injection.
Government has to wait for taxpayers to sell property, investments, etc. It is also not expected to raise significant amounts of revenue, unlike a VAT hike. The tax-free savings account annual contribution limit of R36,000 and lifetime limit of R500,000 were not adjusted for inflation. This effectively erodes the tax benefit year on year.
Competing spending priorities in the 2025 GNU budget
Government spending comprises a bloated public sector wage bill and an unsustainable debt burden. This consumes 22 cents of every rand of revenue.
Spending pressures related to state-owned entities (specifically Eskom and Transnet) also contribute. What is disappointing is that, despite rapid government spending increases, there has been no improvement in economic growth.
Instead of reducing the growing wage bill, the Minister opted to manage current wage costs by providing “certainty” for budget-planning purposes. He noted that 2025 public service wage agreements would cover a three-year period. This contrasts with recent contracts that have covered only one or two years. He committed to reducing the 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. However, the proposal was abandoned over concerns it could restrict Treasury’s ability to deliver on core functions.
The budget review indicated that global experience with fiscal anchors suggests “a focus on procedural reforms”. These reforms would be achieved through transparency and accountability. A discussion document presenting options for long-term anchors was released with the 2025 GNU Budget speech.
Struggling state-owned entities
State-owned entities remain distressed due to weak governance, financial pressure, and ongoing operational challenges.
Many continue to operate at a loss and depend on substantial government support. The Minister, however, kept a firm stance. No new allocations were made for struggling state-owned entities, forcing them to stand on their own.
Health system and NHI
Although the Minister of Health is adamant that National Health Insurance (NHI) will go ahead, the future of the health system remains unclear. This is due to the scale of opposition and uncertainty surrounding its costing and funding.
To strengthen public healthcare facilities and prepare for NHI, an allocation has been assigned to the Department of Health. This includes a proposed costing exercise to build more hospitals.
Social protection and SRD grants
Social protection is a burning issue for many South Africans. The social relief of distress (SRD) grant, initially a temporary COVID-19 relief measure, was extended yet again to 1 March 2026.
An additional allocation of R35.2 billion was added. During the 2025 State of the Nation Address, President Cyril Ramaphosa noted that the SRD grant would form the basis for a sustainable form of income support. This will be a universal basic income grant (BIG).
The review of South Africa’s social security system is expected to be completed by September 2025. However, Godongwana stated that if the SRD becomes a permanent expenditure item, a revenue source must be found to fund it. This is to ensure it does not “crowd out” other spending.
Economic growth as SA’s key challenge
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, the absence of faster growth and global headwinds mean that tax revenue will remain under pressure. Treasury will have to make tough trade-offs on where and how to spend funds.
SARS’s long-term tax policy strategy
Treasury’s long-term tax policy strategy looks to increase tax revenue by broadening the tax base. It also aims to tackle South Africa’s tax gap, which is the difference between what should be paid and what is actually paid.
Current tax compliance levels in South Africa are increasing. This is due to SARS’s efforts to make it uncomfortable and costly for non-compliant taxpayers. We have seen tangible results through aggressive investment in the latest technology. This technology sources data and analyzes taxpayer behavior.
To support these efforts, an additional R3.5 billion has been allocated to SARS in the current financial year. An additional R4 billion has been allocated over the medium term.
Policy reforms and tax revenue generation
During 2024, two longer-term policy reforms came into effect. These are 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 used the withdrawal benefit. Tax collections from these withdrawals have reached R11.6 billion as of February 2025. This is more than double the 2024 Budget’s estimate of R5 billion.
Although this “windfall” has alleviated revenue pressure in the short term, it is not a guaranteed long-term revenue source. 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. This was subject to tax at their marginal tax rate.
Since only one-third of new contributions are allocated to the savings component, it will take time to replenish. Without sizable withdrawals, there will be less tax revenue.
A global minimum tax was introduced in 2024. This aligns South Africa with international best practices. It is expected to boost revenue collections and reduce the incentive for large corporations to shift profits. The first taxes will be due in 2026.
Wealth tax considerations and future reforms
There is continued focus on generating revenue from wealthy individuals. Despite rumors ahead of the 2025 GNU Budget speech, no mention of a wealth tax was made. However, Treasury indicated that they are working with SARS to understand the levels of wealth declared by high-net-worth individuals.
A potential wealth tax for these individuals is under consideration. No final decision has been made yet. Currently, individuals holding assets valued at R50 million or more must declare their wealth to SARS as part of their annual tax return filing.
The minister provided clarity on proposed reforms impacting the taxation of collective investment schemes. This followed Treasury’s publication of a discussion document in November last year. The government acknowledged the concerns raised by the industry. It confirmed that it does not intend to tax all unit trust returns as revenue. Consultations will continue in 2025.
What lies ahead for SA’s 2025 GNU Budget
Balancing the country’s books has become increasingly difficult for the Minister of Finance. The success of the 2025 GNU Budget depends on how well the government can balance competing opportunities and spending demands.
It is clear that there is little room for significant tax adjustments when the tax burden is already high. Increasing tax rates is not a sustainable solution, especially when the 
economy is not growing. The real loser today is the average South African taxpayer. In a struggling economy, increasing VAT and not addressing bracket creep is a double whammy. South Africans face tough times ahead.
Looking ahead, South Africa’s long-term prosperity depends on a firm commitment to implementing structural reforms. This must be supported by infrastructure investment. A substantial reduction in the cost of public service and inefficient services is also necessary.
Carla Rossouw | Head | Tax | Allan Gray | mail me |
