Fiscal drag or bracket creep refers to the practice of not adjusting income tax brackets in line with inflation. This is often termed a 'silent tax' as it results in taxpayers, whose incomes have increased to take account of inflation, paying more tax as a result of falling into a higher tax bracket. It is therefore a favourite tool of a fiscus that needs to balance its budget, but which faces opposition to introducing new taxes (or increasing tax rates outright).

National Treasury has used fiscal drag in order to bolster its revenue collection in recent years, but with the personal income tax brackets not having been adjusted since the 2023/24 financial year, this 'silent tax' has started becoming noticeable to taxpayers. Coupled with positive anticipated collections from SARS for the 2026/27 financial year, the personal income tax brackets will therefore be adjusted upwards to take account of inflation.

Arguably, however, National Treasury will still benefit from the last three years of bracket creep as the adjustment to the personal income tax brackets in the coming financial year will only take account of last year's inflation. Therefore, taxpayers whose incomes have increased with inflation for the last three years may still find themselves in a higher tax bracket than they would have been had National Treasury adjusted the personal income tax brackets during each of the last three financial years.

However, to sweeten this lukewarm victory for taxpayers, National Treasury has also announced increases to the tax thresholds and exemptions continued in the ITA. Most notably, the R100,000 donations tax exemption for donations by individuals, which has remained stagnant since 2007, is being increased to R150,000.

In addition, the capital gains tax exemptions, many of which have remained the same since 2012, are also increasing. For individuals, the first R50,000 of a person's taxable capital gain each year is now exempt (up from R40,000), while during the year in which a person dies, this exemption is now R440,000 (up from R300,000). The primary residence exemption has also increased from R2 million to R3 million.

On the whole, therefore, this Budget has brought some welcome relief for taxpayers. Hopefully it is a sign that the fiscal drag of recent years is being left behind, and SARS is collecting revenue from a growing tax base, instead of collecting more revenue from the existing tax base. Those who are proponents of Arthur Laffer’s famous curve will also likely welcome this.