Jerome Brink | Director | Tax and Exchange Control Practice | Cliffe Dekker Hofmeyr | mail me |
It goes without saying, but South Africa faces a significant and concerning unemployment rate. The 2025 State of the Nation Address reiterated South Africa’s persistent employment challenges. In particular, the Quarterly Labour Force Survey reported an unemployment rate of 31.9% in Q4 of 2024.
Even more concerning is the lack of employment within the younger population. Statistics South Africa recently noted a 45.5% unemployment rate among young individuals aged 15 – 34 years.
Encouraging employers to increase employment
The future of South Africa depends on its youth and their ability to upskill and become employable. This, in turn, enables them to contribute to the economy and support South Africa’s overall prosperity. With nearly every second young person unemployed, youth unemployment remains one of the most critical issues facing the country.
If interventions and programmes are not implemented, this crisis could lead to drastic and long-term negative effects.
One such intervention is the Employment Tax Incentive. This initiative encourages employers to support labour market activation and increase employment. It does so by allowing them to reduce their employees’ tax liability when they employ individuals who meet specific criteria, such as those within the youth category.
Typically, individuals qualifying under the Employment Tax Incentive programme do not exceed the lowest marginal income tax threshold, which is a taxable income of R95,750 per annum.
Because these individuals fall below the minimum tax bracket, employers are not required to deduct employees’ tax on their remuneration. However, employers must still pay employees’ tax for those who do not meet the qualifying criteria.
The Employment Tax Incentive reduces this tax liability, thereby lowering the employer’s monthly tax bill payable to SARS.
Current Employment Tax Incentive calculations
The Employment Tax Incentive involves a fairly complex monthly calculation to determine the amount an employer can claim for each eligible employee.
At its core, this calculation considers three key factors:
- The monthly remuneration paid to the qualifying employee;
- The period of employment (i.e., whether it falls within the first or second 12-month phase); and
- The amount or percentage claimable.
Since the Employment Tax Incentive’s introduction in 2013, the applicable monetary thresholds and amounts have been amended due to inflation and other factors. Notably, in 2022, legislation amended the calculation of monthly remuneration under the Employment Tax Incentive Act 26 of 2013 (ETI Act), effective 1 March 2022.
The current Employment Tax Incentive formula is as follows:
| Monthly Remuneration | First 12 Months | Second 12 Months |
|---|---|---|
| R0 to R1,999.99 | 75% of monthly remuneration | 37.5% of monthly remuneration |
| R2,000 to R4,499.99 | R1,500 | R750 |
| R4,500 to R6,499.99 | R1,500 – (75% × [remuneration – R4,500]) | R750 – (37.5% × [remuneration – R4,500]) |
This table is crucial. Among other things, it highlights that an otherwise eligible employer may be disqualified from claiming the Employment Tax Incentive if the wage paid to a qualifying employee falls below the prescribed minimum.
The actual prescribed minimum wage depends on whether the wage is regulated by a specific measure or by the National Minimum Wage Act 9 of 2018.
Currently, under section 4(1)(b)(i) of the Employment Tax Incentive Act, employers not subject to a wage regulating measure may only claim the Employment Tax Incentive if:
- The employee is employed for at least 160 hours in a month; and
- The employee receives a monthly wage of at least R2,000.
If the employee works fewer than 160 hours in a month, employers must perform an apportionment calculation.
Recent minimum wage adjustments
Effective 1 March 2025, the national minimum wage for all workers increased to R28.79 per ordinary hour worked. This represents a 4.4% increase from the previous minimum.
For a person working 160 hours per month, this equates to approximately R4,606. Therefore, eligible employees working 160 hours or more must now be paid at least R4,606 per month.
Changes to the Employment Tax Incentive income bands
In light of these wage amendments, the government announced adjustments to the Employment Tax Incentive formula and eligible income bands, effective 1 April 2025. These adjustments aim to align the incentive with increased minimum wages and preserve its effectiveness.
The government plans to maintain the maximum Employment Tax Incentive value at R1,500 per month for the first 12 months. For the second 12 months, the maximum will remain R750. However, employers will now only be allowed to claim the incentive at a rate of 60% for wages below R2,500 per month – where such lower wages are permitted due to exemptions.
In addition, the R1,500 monthly incentive will now apply to employees earning between R2,500 and R5,500. This is an increase from the previous R2,000 to R4,500 range. The incentive value will taper as wages increase and will reduce to zero at a monthly income of R7,500, up from the previous ceiling of R6,500.
In conclusion
It is encouraging that the government remains attentive to the influence of minimum wage changes on the Employment Tax Incentive’s design and utility.
In the past, adjustments to the claimable Employment Tax Incentive amounts accounted for inflation and wage changes. This time, however, the focus has shifted to adjusting the eligible income bands.
Going forward, it will be important to assess whether these changes are sufficient to preserve the Employment Tax Incentive’s appeal. If successful, the revised Employment Tax Incentive may continue to encourage meaningful employer participation in addressing South Africa’s unemployment crisis.
