Some good news from the 2019 Budget Speech was Finance Minister Tito Mboweni’s announcement that there will be no increase in personal income tax. Although consumers will be understandably relieved by this announcement, DebtBusters warns consumers to not celebrate too loudly and to be cautious that the phenomenon of “bracket creep” does not set them back.
“Tax bracket creep” occurs when a rise in salary due to inflation pushes a person’s income level into a higher tax bracket. While getting a salary increase is never a bad thing, if you do not take the “tax bracket creep” into account, you might think you can take out more credit than what you can realistically afford. Adding to that, the already increasing living expenses could cause more consumers to become over-indebted.
To illustrate how “tax bracket creep” occurs, if a consumer earns R195 850 per year and as a result falls in the 18% income tax bracket and their salary increases to R220 850 due to career growth, annual inflationary increases and so on, the additional amount earned by the consumer is now taxed at a rate of 26% as it now falls in the 26% tax bracket.
The consumer may be receiving a higher salary, but after taking into account inflation, as well as the higher rate of tax payable as a result of falling in a higher tax bracket, the increase in the consumer’s purchasing power will be lower than what they thought.
DebtBusters’ Chief Operating Officer (COO) Benay Sager says, “This is a good time of year for consumers to be on top of their budgets, prioritise paying off debt and seek help if they are feeling the effects of the rising cost of living on their take home pay.”
DebtBusters advises consumers who are receiving a salary increase to draw up a new budget, factoring in the effects of inflation and tax bracket creep, in order to get a realistic picture of where they stand with their personal finances.