Yesterday, Finance Minister Tito Mboweni delivered the 2021 Budget Speech. He quoted Archbishop Emeritus Desmond Tutu stating that: “Hope is being able to see that there is light despite all of the darkness." The finance minister continued by saying that: “Today I want to leave you hopeful and outline how we will leave this economy in better shape for those who come after us.” What followed was a market-friendly budget. The national budget is based on the government's planned spending for the upcoming financial year and outlines the government’s priorities; just like a person needs a budget and a spending plan, the government needs one as well. This helps them allocate the income they receive from taxes to the areas they need to spend on, like education and hospitals. The biggest implication the budget has on the general public is the change in personal income tax, fuel levies and sin taxes.
The below are key elements that you should note from the speech and how it affects you:
Impact to my budget
Personal income tax brackets were increased by 5%, which is more than inflation. This will mean that you will receive an increase in the amount of your salary that you receive on a monthly basis because your tax will be less. In total, this will provide R2.2 billion in tax relief. An example was provided that if you are earning above the new tax-free threshold of R87 300, you will have at least an extra R756 in your pocket per month after 1 March 2021.
Fuel levies will increase by 27 cents per litre and there will be an 8% increase in the excise duties on alcohol and tobacco products, which means that it will impact how much of your budget will be spent on these items.
Impact on investments
The reaction of the rand was positive – the local currency strengthened from R14.55 to R14.43 to the dollar from the start to the end of the speech. An increase in tax brackets also allows more scope for saving and investing.
Understanding the different taxes
VAT – VAT is levied at the standard rate of 15% on the supply of goods and services by registered vendors. The tax rate was 14% until 31 March 2018. A vendor making taxable supplies of more than R1 million per annum must register for VAT. This rate remained unchanged in this Budget Speech.
Personal Income Tax - Taxable income is the amount of a person's gross income that the government deems subject to taxes. Taxable income consists of both earned and unearned income. Taxable income is generally less than gross income, having been reduced by deductions and exemptions allowed by SARS for the tax year. This is where you will see the increase in the individual income tax brackets by 5%.
Dividends Tax - Dividends tax is a final tax on dividends at a rate of 20%, levied on both SA and non-resident taxpayers in respect of dividends received. Dividends are tax exempt if the beneficial owner of the dividend is a South African company, retirement fund or other exempt person. This also remained unchanged in the Budget Speech.
Capital Gains Tax - Capital gains tax (CGT) is part of income tax. It is triggered when you make a gain from selling something you own (a capital asset). The tax is calculated on the profit you make and not the amount you sold it for.
Corporate Tax – Corporate tax is the tax payable by companies and saw a lowering to 27%, for years of assessment commencing on or after 1 April 2022.
The government does a budget on an annual basis and, as a consumer, this budget address provides a good opportunity for you to also reflect on the state of your finances and better plan for the year ahead by reassessing your current spending and behaviour. It is also important to make sure you understand where your money is going and if you are spending it on the things that are important to you – or, if you don’t know how, educate yourself to help you plan for the future, pay off existing debt or even save for other things you want to accomplish this year.
In light of the highly uncertain economic environment, it has never been more important for you to pay special attention to the Budget Speech, as key decisions highlighted by the minister will impact your financial growth.
Insights provided by Mamello Matikinca-Ngwenya, FNB Chief Economist; Chantal Marx, Head of Research at FNB Wealth and Investments and Ester Ochse, Product Head at FNB Money Management.