It’s safe to say that, in many ways, we are still recovering from the Covid-19 pandemic that threw the world into chaos in every possible way. Currently, South Africa is already in an economic heatwave, with uncertainty mirroring the turbulence brought by international affairs. To add fuel to the fire, we now face the possibility of another VAT increase – the same crossroads we encountered in 2018. The big question is: What will the broader economic picture look like, and how will this impact policyholders and insurance companies?
A look back: The 2018 VAT increase
The last time South Africa raised VAT – from 14% to 15% – the effects were widespread. Consumers felt the pinch as prices rose, and businesses had to adjust to higher costs. Short-term insurance premiums increased, leading many policyholders to reconsider their coverage. The economic strain was particularly severe on lower-income households, sparking public backlash and forcing the government to review zero-rated food items to cushion the impact (Daily Maverick).
For the insurance industry, the challenges were immense. Insurers had to update systems, retrain staff, and adjust pricing models while ensuring compliance with the new rate. The transition was anything but smooth – many insurers faced administrative bottlenecks, policyholders were confused by inconsistent premium adjustments, and VAT calculations on mid-term policy changes created accounting headaches. The industry learned that even a seemingly small increase carries major operational complexities.
Beyond premium adjustments, vehicle-related costs were also affected. The VAT increase contributed to higher vehicle repair costs, as insurers faced rising claims expenses, and consumers paid more for services and replacement parts. While vehicle values themselves were influenced by multiple factors, such as currency fluctuations and market demand, the additional VAT increase contributed to an overall rise in the cost of ownership (Hollard).
Now, in 2025, we face a similar challenge – but this time, the stakes are even higher.
The broader economic impact of the proposed 2025-2026 VAT increase
The proposed VAT increase will see rates rise from 15% to 15.5% in May 2025 and to 16% in April 2026 (BusinessTech). While Treasury argues that VAT is the least harmful tax to increase, its effects on businesses and consumers are undeniable.
Higher VAT means increased costs across goods and services, placing additional strain on an already struggling economy. Inflation is expected to rise, further eroding disposable income and potentially slowing economic growth. While the government aims to generate additional revenue to address fiscal deficits, critics warn that the VAT hike could worsen inequality, trigger business closures, and lead to job losses (Moonstone).
How will this affect insurance companies?
For short-term insurance providers, the proposed VAT increase presents several challenges. Since insurance premiums are subject to VAT, insurers will need to adjust their pricing structures. This creates additional compliance costs and administrative burdens without generating extra revenue. Insurers must also communicate these changes to policyholders, which could lead to confusion and frustration.
The VAT increase also introduces complications for existing policies. For instance:
Will monthly premiums on existing annual policies automatically increase, or will adjustments only apply to new policies?How should insurers handle mid-term cancellations and endorsements that span different VAT rates?Could there be VAT leakage due to delays in settlements between insurers and reinsurers?
These complexities, along with the need to update rating engines, policy documentation, and IT systems, make the transition costly and time-consuming. In 2018, insurers faced significant technological and operational disruptions, and a similar scenario is likely to repeat in 2025–2026.
The impact on private policyholders
For individual policyholders, higher VAT means higher premiums. With household budgets already under pressure from rising living costs, many may be forced to downgrade their coverage, increase excesses, or even cancel policies altogether. This creates a dangerous protection gap – where individuals remain exposed to financial risks they can no longer afford to insure against.
The impact will be felt most by lower- and middle-income households. Many of these policyholders rely on short-term insurance for essential coverage, such as vehicle and home insurance. If premiums become unaffordable, they may have to take the risk of being uninsured, which could lead to severe financial consequences in the event of an accident or disaster.
Additionally, vehicle repair costs are expected to rise further, compounding the financial burden on policyholders. The 2018 VAT increase had already pushed up repair costs, and with inflationary pressures at play, the proposed increase will likely have a similar effect, making vehicle ownership even more expensive.
The impact on business policyholders
Businesses are not exempt from the ripple effects of a VAT increase. Higher VAT will lead to increased operational costs, from raw materials to insurance premiums. Many businesses may pass these costs onto consumers, fuelling inflationary pressure.
For those reliant on commercial insurance, such as fleet or property insurance, the cost burden will be significant. Some businesses may choose to reduce coverage, increase deductibles, or self-insure, all of which carry financial risks. Additionally, businesses with tight profit margins may struggle to absorb the increased VAT, potentially leading to downsizing or closures.
The importance of financial advice in uncertain times
With so much uncertainty surrounding the economy and the insurance industry, working with a financial advisor has never been more critical. A skilled advisor can help businesses and individuals navigate rising costs, explore cost-effective coverage options, and ensure they remain protected without overextending their budgets.
This year has already taught us valuable financial lessons – and with another VAT increase on the horizon in 2026, now is the time to prepare. These tax hikes are not a matter of if, but when. The key question is: Are we ready for them?
By planning ahead, seeking expert guidance, and making informed decisions, policyholders and businesses can weather the storm and protect themselves from unnecessary financial strain.
If you found this article interesting, you may want to read The Importance of Medical Aid Amidst NHI Delays as well.
