Whenever people talk about tax rates for individuals, there is a tendency to focus on the tax brackets. And the marginal tax rates of those tax brackets. It’s almost as though people assume that the marginal tax rate of your income band is your ‘tax rate’. This is not true. What matters is your effective tax rate, which is designed to be on an increasing scale for every extra rand (or dollar) of income.

A South African “Effective Tax Rates” Graph

I made one (based on the 2016/2017 tax rates, and assuming that you just earn straight income with no allowable deductions):

Admittedly, that’s for people under the age of 65. If you’re over 65, there are extra rebates, so the increase in those effective tax rates is more gradual. And that little wobble between the first and second tax bracket (around the R190k mark) is no typo – there is still a small acceleration of effective tax rate as you slip from one bracket to the next.

But the point is: tax rates don’t go up in ‘steps’. They go up reasonably smoothly, and then level off at around the 40% mark:

But don’t be fooled by the levelling. That doesn’t mean less tax is collected – just that more tax collected at the same rate:

It’s just something to bear in mind as the Finance Minister delivers his budget speech this month. Every shift in the tax bracket, every shift in the rebates, and every non-shift in those numbers, will directly impact your tax rate.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and like the Rolling Alpha page on Facebook at www.facebook.com/rollingalpha.