Why your bonus might feel smaller this year: The hidden tax of bracket-creep
Tax As South Africans receive their well-earned bonuses this festive season, many may be surprised to find their pay cheques smaller than expected.
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As South Africans receive their well-earned bonuses this festive season, many may be surprised to find their pay cheques smaller than expected.
The reason is bracket-creep, a hidden feature of the country’s progressive tax system. According to Razael Manikus, COO of Latita Africa, modest salary increases or one-off bonuses can push employees into higher tax brackets, increasing deductions even when real earnings remain the same.
"If you earn R480,000 a year and receive a 6% increase to match inflation, but tax brackets rise only by 3%, a portion of your salary is taxed at a higher rate. Your total tax bill rises even though your real income hasn’t improved," Manikus said.
Manikus said that bracket-creep is often most noticeable around bonuses.
"Once-off performance bonuses or thirteenth cheques increase monthly income dramatically. Payroll systems calculate Pay-As-You-Earn (PAYE) based on annualised income, assuming that the higher amount will continue all year.
"This temporary spike pushes employees into a higher tax bracket for that month."
She added that while the South African Revenue Service (SARS) usually reconciles over-deductions at year-end, the immediate impact can leave employees feeling that a large portion of their bonus has been “taxed away.”
"Bracket-creep extends beyond salaries and bonuses. Many employees do not realise that certain employer-provided gifts or perks count as taxable income under the Income Tax Act."
Cash vouchers, weekend getaways, or holiday prizes from an employer are considered fringe benefits and included in gross income.
"Even small benefits can push total earnings into the next tax bracket, increasing overall tax. Genuine personal gifts from private individuals remain exempt under section 10(1)(n)."
Manikus also advised that employees should plan for bracket creep by reviewing their expected net pay before bonuses.
"Employees can protect themselves from bracket-creep by reviewing annual budget changes to understand net pay impact, requesting payroll simulations from HR or finance departments, and understanding bonus taxation to avoid surprises."
"This includes maximising allowable deductions, including retirement annuities, medical aid credits under Section 6B, and donations under Section 18A; adjusting budgets based on net pay rather than gross salary."
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