Warning for anyone on medical aid in South Africa

Economists at Nedbank warn that the National Treasury may consider reducing medical aid tax credits in South Africa as it looks for additional revenue sources in the budget.

Finance minister Enoch Godongwana will table an unprecedented third national budget on 21 May 2025, following widespread rejection of his previous two attempts.

While the second budget, tabled in March, was approved and managed to pass through National Assembly with a narrow majority, legal challenges and rejection of the VAT hike contained within the budget forced Godongwana to withdraw it.

According to Nedbank, the third go at the budget will be without the VAT hike, leaving a gaping hole in revenue to cover the government’s planned spending.

It said that the finance minister has been left with very little room to make things balance, with any spending cuts likely to be met with just as much resistance as tax measures.

Any attempt to cut social grants, for instance, would likely lead to a “political storm”, it said.

On the revenue side, the finance group said fury over the VAT hikes shows that any major tax measures are likely to be met with more political backlash and similarly rejected.

Echoing other economists and predictions for the next budget, Nedbank said that the National Treausury may have to tap into much smaller pools of revenue.

One such pool would be medical aid tax credits, which will possibly be reduced, “particularly for higher income earners,” it said.

The medical scheme tax credit currently provides a monthly reduction of R364 for the primary member and the first dependent, with an additional R246 per month for each subsequent dependent. 

These rebates were not adjusted for inflation in both the February and March budgets, adding an estimated R1.5 billion to the state coffers.

Cutting medical aid tax credits down wouldn’t be nearly enough to cover the lost revenue from cutting the VAT hike, but would give the National Treasury a small boost.

Medical aid tax credits on their way out anyway

One reason that the National Treasury may not be too scared to touch medical aid tax credits is that the end of the rebate is already on the government’s broader economic plan.

As part of the National Health Insurance (NHI) Act, the government will be tapping into various tax measures and revenue sources to fund the scheme as it rolls out over the next decade.

One of the funding measures is to scrap the medical aid tax credit, adding around R30 billion in funding.

The Department of Health has long held that medical tax credits only benefit those who can afford private medical schemes or pay out-of-pocket for healthcare services.

Under the NHI, medical aids will largely cease to operate—being unable to cover services the NHI pays for—making them redundant.

“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.

Unfortunately for taxpayers, this means they will be losing out on an annual saving of R4,368 for individual taxpayers, and even more for larger families.

If medical aid tax credits are cut in next week’s budget, however, this won’t be to the benefit of the NHI, but rather to the national budget.

According to Nedbank, it’s not the only tax measure to watch out for.

“The fuel levy has not changed since April 2022, so it could be increased,” it said.

By freezing the fuel levy in the February and March budgets, Godongwana tried to soften the blow of the VAT hikes by giving R4 billion “relief” to taxpayers. With no VAT hike, this relief could fall away.

However, Nedbank stressed that these small adjustments will not significantly compensate for the R75 billion tax revenue forgone due to the rejection of the VAT rate increase.

“As a result, we expect the budget deficit to remain wide at 4.8% in 2025/26, 4.5% in 2026/27, and 3.9% in 2027/28,” it said.

“The debt-to-GDP ratio will peak at 79.3% in 2026/27, but remain high, marginally easing to 78.7% in 2027/28.”

Encouragingly, the primary budget surplus, before debt service costs, will likely widen to 1.4% in 2026/27, it said.