Got a Raise? Why You Might Not Feel Richer (hint: Income tax bracket creep)

Ever received a salary increase meant to cover inflation, only to find your budget doesn’t feel much looser? While rising prices are a major factor, another key reason is often income tax bracket creep.

It’s not a new tax, but a consequence of how South Africa’s progressive tax system (where higher income portions are taxed at higher rates) interacts with inflation when the tax bracket thresholds aren’t adjusted accordingly. Understanding this is key to managing your finances effectively today.

What Exactly is Income Tax Bracket Creep?

Inflation pushes up prices and nominal salaries. Income tax bracket creep occurs when the Rand values defining the tax brackets don’t also get adjusted upwards for that inflation.

The result? Your inflation-linked raise pushes your nominal income higher. Even if your real purchasing power is static, this higher Rand amount can push more of your earnings into higher tax brackets or simply mean a larger portion is taxed at the higher rates you already pay. Your average tax rate (total tax / total income) effectively increases. This effect is also known technically as ‘fiscal drag’.

Why this Matters Now in South Africa

This is happening right now. The government explicitly chose not to adjust income tax brackets for inflation for the 2024/2025 tax year, and the February 2025 budget proposals suggest the same for 2025/2026. (Policy context current as of April 14, 2025). This policy increases government revenue via inflation, directly impacting taxpayers’ net pay.

Let’s Make it Concrete: Seeing Bracket Creep with Real Numbers

Seeing the numbers often clarifies things. Let’s use the official SARS tax brackets for 2024/2025 (unadjusted for inflation, with the same proposed for 2025/2026 as of the Feb 2025 budget).

Relevant Brackets:

• 18%: R1 - R237,100
• 26%: R237,101 - R370,500

Scenario:

• Last Year’s Taxable Income: R300,000
• This Year’s Taxable Income (after 5% inflation-matching raise): R315,000

Here’s how much income falls into each bracket:

Notice the threshold (R237,100) didn’t change, even though your income rose nominally. Last year, R62,900 of your income was taxed at 26%. This year, because that threshold didn’t move, a larger amount – R77,900 – falls into the 26% bracket.

This is crucial: Even without jumping to a new higher bracket (like 31%), you’re experiencing bracket creep because a larger proportion of your income is taxed at your existing higher rate (26%). That’s why the raise might feel less impactful after tax.

Seeing the Impact & Taking Control

Awareness is the first step to managing this:

• Demystify your payslip: Understand your deductions, especially PAYE. A rising PAYE percentage after a raise can signal bracket creep.
  • Resource: Our guide helps: Your Payslip Demystified: A Guide to Understanding Your Earnings.
• Estimate your tax: See how income changes affect tax under current brackets to plan better.
  • Resource: Use the Onemoola Personal Income Tax Calculator for a quick estimate.
• Budget realistically: Factor in that bracket creep reduces the real value of your raise when planning your spending. (The Onemoola app can help!).
• Evaluate salary increases: Remember, a raise needs to beat both inflation and bracket creep’s effect to truly increase your spending power.
• Be tax efficient: Ensure you’re leveraging the tax breaks you’re entitled to, like Retirement Annuity (RA) contributions, to manage your taxable income within the rules.

Awareness is Key

Income tax bracket creep subtly increases your effective tax rate via inflation when brackets aren’t adjusted. Given current SA policy, understanding this mechanism helps you interpret your earnings accurately, budget effectively, and make informed financial decisions.