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“VAT hurts consumer spending, it hurts being able to invest and save,” says the Pietermaritzburg Economic Justice and Dignity Group.
Budget 2025’s VAT increase means less money in consumers’ wallets. It also increases the administrative burden on VAT vendors and tax practitioners. Kobus Wentzel, Executive Head of Sales and Distribution at 1Life Insurance, weighs in on where the increase leaves financial advisers and their clients and how it impacts financial plans.
Impact of the VAT increase on consumers
Prices of most goods will increase for consumers with the increase in VAT, which means less money in the household budget for discretionary spend. This includes basic foodstuffs, toiletries and electricity, which the Pietermaritzburg Economic Justice and Dignity Group calculates will leave households R98.96 poorer each month.
“The increase in VAT will further strain household budgets at a time when inflation, joblessness, high electricity prices, and rising transport costs are already eroding purchasing power,” says Dr Velenkosini Matsebula, of Stellenbosch Business School.
Clients may need extra help with budgets to make sure they can meet all their expenses including insurance premiums, savings and investments, and retirement fund contributions.
In addition, with a rise in prices there is always a need to review sums assured so that they keep up with the family’s lifestyle and needs.
VAT increase adds to the compliance burden
Budget 2025 effectively introduced two VAT increases – one of 0.5% on 1 May 2025 and another 0.5% in 2026. While some financial services are exempt from VAT, fee-based financial services do attract VAT, which means advisers and their clients will be directly affected.
VAT’s impact on investment returns
Discretionary investment services attract VAT, which means overall, investment costs will be higher. Ultimately this could mean lower investment returns for clients.
In context, a 0.5% increase in VAT seems low, but as advisers know, a 0.5% increase in investment fees can have a significant effect on total returns. Advisers will need to check which clients are affected and alert them to the higher charges.
This may also be an opportunity to chat with your clients and ensure their return expectations are realistic, and find ways to increase the total return, such as investing in low-cost investments and going through budgets to see if there are available funds to increase investment contributions.
VAT vendors’ increased compliance burden
The VAT increase adds to the compliance burden of some FSPs and all VAT vendors. Not only will VAT vendors need to update their systems and invoicing, they also need to make sure that the correct VAT rate applies based on the relevant dates, such as the date services were rendered, not the date of invoice.
“Two VAT increases in the space of a year will likely create a significant burden on businesses to implement the required changes to their systems,” says PwC.
Advisers who charge fees are encouraged to check their systems and ask service providers and tax consultants for assistance to ensure they are compliant with the new rates.
Extra information and resources:
- SARS VAT page
- SARS FAQs on the VAT increase
- Citywire article on financial services and VAT
More financial hurt for consumers with no bracket creep adjustments in Budget 2025
South Africa has seven tax brackets, with higher earners paying more tax. In order for consumers’ income to keep up with cost-of-living increases, brackets can be adjusted so that a salary increase isn’t negated or nullified by moving into the next tax bracket and having to pay higher tax. For example, when a salary increase pushes you into a higher tax bracket, the higher tax could take up all of your increase along with inflation and general price increases. In some cases, it can completely negate a salary increase.
Budget 2024 and Budget 2025 had no tax bracket adjustment and the cost of living has increased significantly over the last two years. Household budgets are feeling the strain.
The South African Institute of Taxation explains bracket creep in this interview on its website.
Budget 2025 gives advisers more opportunities to help clients with financial planning
Clients will have less available for discretionary spend following the VAT increase and unchanged tax-brackets and tax rates. This doesn’t seem like good news for financial advisers, however, it is an opportunity to help clients:
- Balance their budgets
- Understand how bracket creep can eat into salary increases, just as inflation can erode the power of money
- Review their protection or risk plans to make sure premiums are affordable and that they have sufficient risk cover given the rise in the cost of living
- Review investment plans to check that any higher charges are mitigated, such as by extending the time they are invested and/or increasing contributions
Don’t let VAT increases and bracket creep destroy your clients’ financial plans
Budget 2025 has given advisers a golden opportunity to show clients how they can assist with all their financial plans and help them generate wealth in their households. Household budgets are tight and more money will be going out on the expense side, but that means there is an even greater need for advisers to assist clients with their financial plans so that they can achieve their financial goals.