The South African government has concluded its 2025 budget deliberations, announcing a VAT increase of 0.5% from May 2025, and a possible further 0.5% hike by April 2026 as part of measures to address the growing budget deficit. While the country will not face increases in personal income tax or corporate tax rates, both fiscal drag and the VAT hike will still have significant implications for businesses and employees alike.
The Impact On Employees And Retaining Talent
As businesses adjust to the new VAT rate, employers must carefully consider how this tax change will impact employee disposable income and their ability to remain competitive in the battle for top talent.
“When employees face rising living costs and reduced disposable income, the pressure quickly mounts, not just on their personal finances, but also on their employers. Employees will either expect higher pay to keep up with increased costs or, if that’s not possible, start looking for opportunities with higher-paying roles,” explains Lindiwe Sebesho, Managing Director of Remchannel.
Although there will be no increase in personal income tax for the second consecutive year, the government has opted to freeze income tax brackets, which means that employees who received a pay increase last year may find themselves pushed into a higher tax bracket, effectively nullifying any gains in disposable income due to fiscal drag.
To address the growing financial pressures, businesses should adopt innovative and integrated employee benefits that help ease the financial strain, explains Blessing Utete, Managing Executive of Old Mutual Corporate Consultants. “Companies that take a holistic approach can not only help employees feel valued, but also strengthen their ability to retain talent in a competitive job market by enhancing the perceived value of their company’s employee proposition.”
“Financial insecurity and lack of support have become critical business risks, with skilled employees seeking more pay or better opportunities if remuneration doesn’t keep pace with the rising cost of living,” says Utete.
Boosting Employee Value Amid The VAT Hike
Considering this challenge, Sebesho and Utete suggest several practical strategies that employers can adopt to mitigate the impact of the VAT increase while maintaining employee engagement and competitiveness.
Innovate Pay and Benefits Packages
One of the most immediate responses companies can make is to adjust or innovate pay and benefits packages in a manner that helps employees offset the impact of higher costs. While salary increases that ensure competitive pay are one option, companies can also optimise their benefits to support employees’ financial needs. For example, flexible retirement fund contributions could be considered to provide financial security in the long term while creating net pay support in the short term.
Reassessing Fringe Benefits
Alongside pay and core-benefits adjustments, businesses should reassess their fringe benefits and perks. While there has been no personal income tax increase, the VAT hike presents an opportunity to redesign benefit packages that are better aligned with employees’ evolving needs. By offering non-cash benefits or perks, businesses can deliver more value to employees without placing additional strain on their finances.
Flexibility as an Employee Benefit
Many organisations have introduced hybrid work models, but they can improve further by offering fully remote work or flexible hours for suitable roles. These options reduce commuting costs and provide financial relief. Research by the South African Research Group (SARG) in 2024 shows that inflexible work arrangements are a major stress source for employees. Flexibility is now a key benefit for retaining talent and promoting a positive work environment, even as more companies call employees back to the office full-time.
Integrated Wellness Programs
Employers can adopt a more integrated approach to employee well-being, especially given the rising financial pressures on healthcare. This includes implementing wellness programs that encourage preventative physical health strategies, offer access to affordable health insurance and address employees’ financial and mental well-being, which can reduce stress and improve productivity.
Group-negotiated discounted products or services, such as healthcare, fitness programs, and financial services, can be particularly beneficial for organisations with diverse income levels, ensuring all employees can access essential services affordably. Additionally, offering wellness benefits, like gym memberships or preventative health checks, can enhance employee well-being and help them save money.
Investing in Skills Development and Training
Businesses can adopt a long-term strategy by investing in practical skills development and training. Providing employees with career growth opportunities enhances productivity and demonstrates a commitment to the workforce and the company’s long-term sustainability. Investment in training adds value to employees and allows them to increase their earning potential through promotions and other opportunities. This approach fosters loyalty and plays a critical role in talent retention, particularly during challenging economic times. By improving employee productivity and investing in their development, businesses can retain their talented workforce despite financial pressures.
As businesses face the impact of the VAT increase, employers must balance the need to remain competitive with supporting employees who are facing reduced disposable income. “While the VAT increase will affect both business costs and employee pay, companies that help employees manage their finances better, offer flexible benefits in a responsible manner, and invest in workforce development will strengthen their employee value proposition. This approach ensures employees feel valued and supported, making them more likely to stay engaged and loyal,” Sebesho concludes.
