The proposal to eliminate the medical tax credits will translate into a significant reduction in disposable income for households, says Tax Consulting SA.
In a presentation to the National Council of Provinces’ Select Committee on Health and Social Services last month, the Department of Health once again said medical tax credits should end and the money re-routed to fund the National Health Insurance Fund.
“Medical tax credits only benefit those that are in a position to pay either through medical scheme coverage or out-of-pocket, but do not benefit the poor. The money that goes into tax credits will be consolidated to benefit all as the role of medical schemes and out-of-pocket payment reduces under NHI,” the department said.
Tax Consulting SA said if an employee belongs to a medical scheme, the medical credits reduce the employee’s monthly PAYE, thereby increasing his or her net take-home pay.
The following monthly medical credits apply to the 2024 year of assessment (1 March 2023 to 29 February 2024):
- Principal member: R364
- First dependant: R364
- Each additional dependant: R264
If these credits are eliminated, it will translate into a significant reduction in disposable income for households, Tax Consulting SA said. For a family of four, the loss will be R1 220 a month, or R14 640 a year. A family of two will experience a monthly decrease of R728, equating to R8 736 annually. Individual net take-home pay will decrease by R364 a month, or R4 368 a year.
The medical tax credit system was designed to create equitable tax reductions across all income levels and tax brackets, Tax Consulting SA said.
It said lower-income earners who can afford only a basic medical scheme option or hospital plan will feel the pinch the hardest. This is because whereas the credits may have reduced an employee’s tax liability to an insignificant amount where the employee’s earnings were just above the tax threshold, the employee may have to fund a higher monthly PAYE amount, which will equate to less disposable income. As a result, the employee may have to forego membership of a medical scheme.
With medical schemes implementing steep contribution increases every year, further plan downgrades or membership cancellations could “cripple” medical schemes, Tax Consulting said.
Professor Keith Engel, the chief executive of the South African Institute of Taxation, said the proposal to end the medical credits has been on the table for more than 10 years, and the Department of Health will continue to push for their elimination.
Economist Dawie Roodt said he did not have a problem with removing the tax break on medical schemes contributions if this was offset by a general reduction in taxes.
He said there should be tax breaks for medical scheme contributions or medical expenses. A tax system is supposed to be neutral, whereas the tax credits were not.
The issue is that the typical middle-income taxpayer is already hugely overtaxed, and the Minister of Finance has indicated that he will increase taxes again, and it will be on the same people, Roodt said.
