Understanding Fiscal Drag – The Hidden Tax Increase Affecting Your Workforce
With no changes to personal income tax brackets in the 2025 Budget, South Africans face a growing invisible tax burden: fiscal drag. This phenomenon disproportionately affects employees receiving inflation-based salary increases and poses strategic challenges for business leaders.
What Is Fiscal Drag?
Fiscal drag occurs when tax brackets remain unchanged despite inflation, pushing taxpayers into higher marginal brackets without an actual increase in their real income. The result? Higher tax payments and shrinking take-home pay.
Real-World Example
An employee earning R40,000 per month who receives a 6% raise might expect more disposable income. But thanks to fiscal drag, they could end up with less take-home pay than before the raise.
Business Implications
- Employee Morale: Raises that “feel like pay cuts” due to tax effects can create unrest.
- Remuneration Strategy: Businesses must assess how to structure packages for net benefit.
- HR and Payroll Complexity: Aligning gross-to-net earnings while managing expectations requires clarity.
Mitigation Strategies
- Offer non-cash benefits like pension contributions or tax-efficient bonuses.
- Equip HR with salary adjustment templates and fiscal drag calculators.
- Communicate clearly — staff should understand why a raise may not mean more take-home pay.
How Marwick & Company Supports You
We offer:
- Personalised payroll impact reviews
- Salary structuring advisory
- Fiscal drag explainer tools for internal comms
Conclusion
Fiscal drag is subtle, but its impact is substantial. Let us help you turn this hidden tax into a known factor — and prepare strategic responses that protect both your business and your people.