Breaking down how a VAT increase may impact investors

During the recent 2025 Budget Speech, the Finance Minister proposed a phased increase in the standard Value-Added Tax (VAT) rate, rising from 15% to 15.5% on 1 May 2025, with a further 0.5% hike to 16% scheduled for 1 April 2026. This measure aims to bolster fiscal stability amid a sluggish economy (2025 GDP growth: 0.7%) and rising public debt (76% of GDP).

For the average South African, however, the VAT increase poses significant challenges to their cost base, investment portfolios, and purchasing power. This article explores the various layers of impact for investors and outlines actionable strategies to safeguard your hard-earned savings.

Breaking down the impact on investors

1. Impact on cost base

The proposed VAT increase directly raises the cost of VAT rated goods and services, which accounts for 43% of household expenditure (Stats SA, 2025). Pre-retirement investors and retirees with a relatively fixed income face heightened financial strain as a result.

A consumer spending R25 000/month on VAT rated items will pay an additional R3 875/month in VAT from May 2025 (up from R3 750), rising to R4 000/month in April 2026.  

While non-discretionary expenses like utilities, healthcare, and basic groceries (zero-rated) remain unaffected, the VAT increase comes in addition to annual increases applied to other essential expense items. These sticky expense items, which include electricity, fuel, medical aid and education, have jumped at a pace beyond that of the expected CPI for 2025 as shown below.

Source: Nedbank

Since the average salary has not increased by the same rate, the net effect is likely that consumers will reduce spending on non-essential items (especially after the April 2026 increase), impacting sectors such as retail and hospitality.

2. Reduced retirement contributions

Higher living costs may force retirees to cut back on retirement fund contributions. According to National Treasury, retirement contributions fell by 2.8% in Q1 2024, threatening long-term wealth accumulation. This decline is further exacerbated by the R35 billion reduction in retirement funds due to the Two-Pot Retirement System withdrawals in 2024 alone. Consequently, over time, the reduced contributions and annual Two-Pot withdrawals may lead to more people retiring with less than what they need.

3. Impact on purchasing power of invested capital

The proposed VAT hike would add 0.3% to headline inflation, potentially contributing to the rise in the expected inflation of between 3.1% for Q1 2025, and 5.1% by the end of Q4 2025. In practical terms, a retiree with R3 million in savings could lose R120 000 worth of purchasing power in 1 year based on our expected inflation for 2025. This is why investors need to consider investing in funds and assets that grow their capital at a pace that outpaces the inflation rate, any future VAT increases and the price level rise in sticky expense line items.

What can investors do to minimise the negative impact?

Step 1: Adopt dynamic spending adjustments

The first place to turn to is your monthly budget. The first objective would be to trim discretionary expenses (e.g., luxury goods) and secondly, to prioritise essentials. Once this is achieved, the last objective would be to assess whether your contributions towards your retirement fund are sufficient to live the same lifestyle in retirement, if not, any excess cash would then need to be allocated towards increasing your retirement contributions.

Step 2: Leverage tax-efficient vehicles

You may choose to allocate the additional retirement contributions in either a Tax-Free Investment account (TFI) or a Retirement Annuity (RA), or your employer’s pension fund. These products are ideal products for contributions focused on saving towards retirement.  While RAs and pension contributions reduce taxable income, they, with the addition of your TFI contributions, are an effective mechanism to reduce your overall tax burden despite the VAT increase.

Step 3: Consider investing in multi-asset funds

The truth is no one can predict the ‘down-the-line’ impact of the VAT increase with accuracy or whether it will happen at all. This uncertainty, to some degree, translates in volatility across financial assets. This emphasises the importance of:

• Investing in funds that invest across multiple assets classes
• Choosing funds that reliably outpace the impact of inflation (and VAT increases) on their cost base. This is especially important for long investment periods as the increases in your cost base accumulates significantly over the long-term

Examples of such multi-asset funds include the Nedgroup Investments Opportunity Fund, which is part of our Flagship Fund Range, and the Nedgroup Investments Core Diversified Fund, which is part of our passive fund range. These investment solutions have outperformed cash, inflation and their benchmarks over the medium- to long-term.

Step 4: Consider investing in hard currency offshore assets

As a global South African consumer, we cannot ignore the impact of the ZAR on our purchasing power. In 2024 alone, the ZAR depreciated by 9% against the USD. Should foreign direct investors become wary of the South African fiscal position, the ZAR may depreciate even more in 2025 and squeeze consumers’ cost base further in the year ahead.

However, for investors with offshore exposure, a weaker ZAR may positively contribute to the return of a global fund. As such, as our fiscal and political position remains contentious, you may want global exposure through the Nedgroup Investments Core World Index Feeder Fund as an example, to offset the impact of a weakening currency on your purchasing power, and diversify your ZAR-based assets.

Step 5:  Consult a Financial Planner

Reviewing your financial affairs annually following these 5 steps is critical. The proposed VAT increase underscores the importance of conducting this review whether it is promulgated or not. More importantly. you are not alone. Consider reaching out to a Financial Planner at least once a year for tailored financial advice and execution. Your financial planner is a key stakeholder in helping you build resilient financial strategies that withstand the test of future fiscal and political changes, and tax changes on your hard-earned savings.