The VAT rate increase and what it means for you

The VAT rate increase and what it means for you

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The South African population was recently hit with a value-added tax (VAT) rate increase from 14% to 15% for the first time in 25 years – further increasing the cost of living and leaving the already cash-strapped consumers with less disposable income.  

Cephas Forichi, Milpark Education’s investment management lecturer, explains that the VAT increase means that people are now paying more for goods and services that are VAT rated. “VAT is a regressive tax, where the percentage of tax paid decreases as the percentage of taxable income increases. In relative terms, the poor will be most negatively impacted by the increase in VAT than the rich. Having said that, we expect an uptick in inflation figures, compounded by increases in other taxes and levies, including fuel levy and excise duty.”

While the increase will have an impact on lower- to middle-income earners, Forichi offers a reprieve. “South Africans should cut their expenditure on VAT-rated goods in favour of zero-rated and exempted goods such as brown bread and fresh vegetables, which are even healthier. With the sugar tax now in effect, South Africans should consider reducing expenditure on products that are levied the sugar tax as they will pay more, i.e. pay VAT on top of the sugar tax..”

The VAT increase also encourages people to assess their budgets and find innovative ways to make their money stretch even further. We have compiled a list to help survive the increase: 

Review and understand the interest rates on your debt

While it may be tempting to spend on credit, consider purchases carefully against the total cost of repayment. Create a plan to reduce your debt that works for you, paying additional amounts to the most expensive debts first, or perhaps starting with those that provide the quickest wins for positive momentum.

Save, save and save again

Whether used to cover emergency costs or to achieve our dreams and goals, saving is an important tool to create the life we want and protect us from expensive debt. Partner with a financial adviser to craft a savings strategy that meets your needs and makes use of tax concessions where possible. Those who can spare some few rands should opt to invest in tax-free savings

Create a financial plan

A financial plan helps you develop strategies to balance needs in the short term, as well as for medium- and long-term goals. Combining attention to what you want to achieve with an understanding of your finances and taking action is key to financial wellness.

 

25 Apr 2018