*This content is brought to you by BDO South Africa
By David Crossley*
What might appear to you and I as a reasonable salary increase at the beginning of the year can be diluted into oblivion by a number of factors largely beyond our control.
Bracket Creep is when an increase to a person’s salary effectively places them in a higher tax bracket than they were before, resulting in a comparatively higher rate of tax being levied on a PAYE basis. This has a negative effect on the net take home pay that a person will enjoy.
The current thinking in South African tax and financial circles is that the impending Budget speech will use the man in the street as a conduit for increasing income to the fiscus by raising the rates of tax, particularly for higher and medium income earners – Judge Dennis Davis has been quoted as suggesting that raising the personal income tax top rate from 41% to 45% may be a good option. This will further eat into any salary increase that may have been awarded.
In addition, an increase in remuneration will create a domino effect on deductions such as:
- Pension or Provident fund contributions
- Group Life and related Risk benefit costs
Notwithstanding these unavoidable deduction increases, the trend with Medical Aid companies is that contributions always seem to increase at double the official rate of inflation, with increases at the end of 2016 averaging something around 12% to 15%, which in turn will help to negate the employees’ increases.
Sadly, there is no ‘silver-bullet’ answer to this vexing conundrum, but there are a number of things that individuals can do to try and mitigate this ‘bracket creep’.
Most of the solutions will involve some serious introspection on how net income is spent and some solutions may involve some downgrading of benefits.
Ultimately it boils down to what an individual can afford and whether some lifestyle changes are required:
- Medical Aid – Consider downgrading to a less expensive plan, but before this is contemplated, careful consideration is needed as invariably a downgrade comes with less comprehensive benefits. NEVER cancel a medical aid. Not only will this throw you on the mercy of the State health system, but re-joining at a later stage may carry substantial penalties and exclusions for up to a year.
- Revisit your budget – Careful scrutiny of current spending habits will always reveal opportunities for ‘cutting and pasting’ expenses. To this end, examine things like cell-phone charges, excessive water and electricity bills, personal spending on entertainment etc.
- Salary package – sit down with the HR representative or your Financial Planner and see if there are any tax effective ways of restructuring your remuneration package. Maybe the inclusion of a car allowance would be advantageous, if you are using a car for company business.
Blaming the system or your employer is the easy way out and will not change the state of affairs. Rather examine your options in the light of the above and take whatever action will benefit you.
- David Crossley, CFP, Business Manager, BDO South Africa
