Middle class families squeezed by ‘double taxation’

22% income tax, but an effective 51% tax rate.

South Africa’s upper middle class are under substantial financial pressure as they pay high tax rates and get limited benefits – they therefore effectively double pay for services which their taxes should provide.

MyTreasury.co.za crunched the numbers to see the true effective tax rate paid by middle income families in South Africa. We use data analysis to help South African consumers make more informed financial decisions. Upper-middle income households, earning around R100 000 per month, are paying 22% income tax but a total effective tax rate of 51% when you factor in the public services that these South Africans have to fund themselves, because the state is not living up to its obligation to provide good quality services that should be covered by their taxes.  

Public services funded privately 

Citizens pay taxes to fund infrastructure and public services. At the most basic level, these goods include security, education and healthcare which are provided by the state in most countries. However, due to well documented problems with South Africa’s state-provided education, healthcare and crime prevention services, families with higher incomes are compelled to obtain them privately. In addition, there is no state pension in South Africa and individuals need to save a percentage of their income for retirement.

My Treasury’s analysis has revealed the extent of this double tax on middle- and upper-income families. It’s no wonder these South Africans are angry that their taxes fund security upgrades at Nkandla and yet they’re also forced to pay themselves for armed response at their homes.

MyTreasury.co.za based its calculations on a household of two adults and two school-going children.



Typical middle income family 

In our hypothetical household, parent A earns a gross salary of R61 667 per month, or R740 000 annually. Parent B earns R38 333 each month, which is R460 000 per year. Their combined gross monthly income is R100 000. However, their take home pay is reduced by contributions to pension funds of 10% of their gross income as savings for retirement.

Breakdown of the total tax burden 

The most significant tax is income tax, which consumes approximately 22% of this household’s gross income[1]. This tax typically is deducted from pay cheques every month and paid over by employers to Sars on behalf of employees. But it doesn’t end there. There are also municipal rates and taxes [2] and consumption taxes on household purchases (fuel tax[3] and VAT[4]) – these amount to approximately 10.5% of gross household income. Traditional taxes therefore come to approximately 33% of household income.

That’s comparable to high tax developed countries like the United Kingdom[5], but this does not include the additional cost of having to pay for public services privately. In many countries, people in this income category are inclined to use quality public services. Only the super wealthy in these countries can afford to pay for them privately.

When these services are included, the real upper middle income tax bill in South Africa climbs to over 50%. Private schooling for the two children is a major expense. While South Africa’s most elite private schools have tuition fees of over R220 000 per student per year, MyTreasury.co.za assumes more moderate total tuition expenses for both children combined of R156 000 per year (R13 000 monthly)[6]. A basic family medical aid is about R4 000 per month (R48 000 per year). Security, an alarm system connected to armed response, is around R1 500 monthly (R18 000 per year).

This family is thus required to fork out an additional 18.6% of their income for healthcare, schooling and security, taking their effective real tax rate to a whopping 50.7%.

There are obvious historical reasons for South Africa’s small tax base. It reflects the extremely unequal distribution of income and wealth in the economy. But a closer look at household expenditure reveals that while middle- and upper-middle income families are obviously not poor, it is this group which is really feeling a hard tax pinch. Ultimately, if the standard of public services was raised by government, the higher tax burden on the middle class would reduce.

As South Africans deal with bad news about the economy, this double taxation effect is yet another reason for them to ensure that they are financially savvy. One way of making up for the shortfall is to ensure that they are earning the highest possible return on their savings.

[1] This is calculated after taking into account rebates and allowable deduction for pension fund and medical aid contributions.

[2] Municipal rates and taxes calculation is based on a Johannesburg property worth R2.2 million.

[3] The fuel tax is based on petrol consumption of just under 100 litres per month per car (an approximate average for a Johannesburg based driver under city normal conditions).

[4] VAT is charged at 14% on the purchase of most goods and services.

[5] The Telegraph reported that households in the UK earning £100 000 paid total taxes of about £36 000 (or 36%). However they also received benefits of £7 000 from the state resulting in a net contribution of only £29 000 (or 29%).

[6] This has been benchmarked against a popular private school with campuses across the country.

Michael Kransdorff is chief economist and co-founder of My Treasury. 

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22% income tax on 1.2 bars income. Is this correct? Sounds a bit low.

Wow Robert – you need to have your brain infarction attended to immediately

BUT you get domestic help at dirt cheap prices – so it all works out

only if you choose to pay crummy wages.

Buy you do (pay crummy wages).

I suppose when you were here in SA, you paid above average wages to your maid and gardener?

If one is that type of employer, it may be cheap. But if the employer is a person with empathy and tries to treat others like you would like to be treated, it works like this.

Several people employ the same person as a domestic worker for one or more days per week. You all become more than just an employer but people who look after the well-being of the person you employ. It costs you a living take-home wage (discussed with the person). Then you add to this the cost of transport to and from work, opening an investment account in which one places funds to serve as a pension for when your domestic worker gets old. Plus one of the group collecting money from others when your employee gets allocated a tiny RDP house but if you all contribute an extra lumpsum the size of the house can be close to doubled. When anyone in the family gets sick, has problems with school fees needs to go home to see to their aging mother, you help.

Then there was the need to register your worker for unemployment insurance and pay (an admittedly trivial amount), into the national UI fund.

Your domestic worker is such a decent and honest person that you trust them totally. When after the retirement (of both of you) they phone with a desperate financial need, you help because you know of the anguish it would have cost them to phone you. That is the South Africa that I know.

The trouble with this model is that it is expensive. When one retires one may no longer be able to afford a domestic worker but decide to do the work oneself. Realistically, if everyone adopted it, I suspect unemployment would rise.

The idea that everyone sets out to exploit everyone else is false in my experience. Most humans are human.

Indeed, low wages do not imply exploitation. The domestic worker has many options including working for whomever they choose as well as further education and moving into another field.

It all boils down to one single issue: Trust.

I don’t trust anyone. I don’t trust people to be benevolent actors. In this example I trust neither the employer (to be kind) nor the employee (to not take advantage and abuse the employer’s kindness).

The problem with society is the level of trust that is required for it function is far too high.

We need a trustless disintermediated society so that when someone asks me: “Do I trust this person or this institution?” My answer will simply be: I don’t have to.

But how do you solve such a complex societal problem? The answer is already out there… prepare yourselves.

+robertinsydney …you smug old fart

You enjoyed life in SA with all its frills …now you most likely freeload off the Oz state.

At your twilight stage in life you have spare smugness to gloat… better you spend it over your bereavement and over your wife’s grave. You obviously have not emotion left for fellow South Africans.

So this household has only got 39k left to live on and they haven’t started paying the bond,the two cars, groceries, insurance,water,electricity,holidays,gardener,domestic help,etc.No wonder the average household’s in such debt!

Anybody who can afford a gardener and domestic help is not struggling.

^^^ Socialist alert ^^^

50% of the price of electricity is a cadre and incompetence tax for the benefit of criminal ANC cronies and their bosses, the Guptas.

So half of our electricity bill goes toward funding criminality and inefficiency. The South African middle class must be the only group of taxpayers in the world who are forced by government to finance corruption, and does nothing about it.

This a nonsensical article!!! What about bonuses? share options etc????

Not mentioned but also applicable is:
– added rates and taxes and electricity for those that don’t pay;
– pot hole and road fixing;
– extra vehicle costs for supporting the high vehicle import protections;
– eToll.

Taking R100 000 pm income as hypothetical example is unrealistic. In my experience very few people earn that kind of income. My experience is that the “middle class” have been wiped out by mainly the bad economy and ANC entitlement and totally unrealistic and illogical BEEEEE policies and corruption.This made COL just too expensive.Inflation and unemployment are much higher than govt wants us to believe.If you can buy a house for the price of a car then something is very wrong.

What this article doesn’t address is upper middle class families with only one primary income earner. As a result of a single income earner bringing in the majority of the income, say 1 Mill per annum, the average income tax rate starts at roughly 32%. Include then all that is mentioned, and much that is not such as capital gains tax which is also NOT inflation related so is completely unfair in almost every respect, then the reality is that your dealing with effectively 35% of your income being yours to spend.

Ohh, and this pressure is compound given that families are compelled to go into debt which is expensive……

Saving has become a luxury, even the upper middle class can no longer enjoy.

End of comments.




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