VAT Increase
How the Upcoming VAT Increase Could Affect Insurance Companies and Policyholders
South Africa is still grappling with the economic aftershocks of the COVID-19 pandemic. As the country navigates inflation, global economic uncertainty, and fiscal challenges, a proposed increase in VAT looms on the horizon. If implemented, this tax hike could significantly impact both consumers and businesses—including the insurance industry.
This isn’t the first time South Africans have faced a VAT increase. The last adjustment in 2018—from 14% to 15%—brought notable challenges. Now, with the proposed hike to 15.5% in May 2025 and 16% in April 2026 (BusinessTech), many are questioning what lies ahead.
The Last VAT Increase
Lessons from 2018: The Impact of the Last VAT Increase
When VAT increased in 2018, South African consumers immediately felt the strain. Prices rose across various sectors, forcing households to adjust their spending habits. For short-term insurance policyholders, premiums increased, leading some to reconsider or downgrade their coverage. The government responded to public backlash by reviewing zero-rated food items in an attempt to soften the blow (Daily Maverick).
For the insurance industry, the challenges were far-reaching. Companies had to update IT systems, train staff on the new tax structure, and ensure compliance—all while maintaining smooth operations. The transition wasn’t seamless, with policyholders facing premium inconsistencies and confusion. Additionally, insurers had to navigate complexities such as VAT calculations on mid-term policy changes, resulting in administrative hurdles.
Motor vehicle insurance also saw a significant impact. The rise in VAT contributed to higher repair costs, as insurers dealt with increased claims expenses and policyholders faced more expensive replacement parts. While vehicle prices are influenced by multiple factors—including exchange rates and supply chain issues—the VAT hike further increased the cost of ownership (Hollard).
Now, with a new VAT increase proposed, the financial implications for insurers and policyholders could be even more profound.
Securitas® Financial Group
What the 2025-2026 VAT Increase Could Mean for the Economy
While the Treasury has argued that VAT is a less disruptive tax to increase, its economic consequences are inevitable. Higher VAT leads to increased prices across goods and services, affecting disposable income and economic growth. Experts warn that this could exacerbate inequality, trigger business closures, and lead to job losses (Moonstone).
Rising inflation and shrinking consumer spending power could put further pressure on the insurance sector. Policyholders may need to reassess their coverage, while insurers will have to manage rising operational costs and compliance requirements.
Short-term Insurers
The Challenges for Insurance Companies
For short-term insurers, the proposed VAT increase presents several operational and financial hurdles:
Premium Adjustments:
Insurers will need to update pricing models to account for the new VAT rate, increasing administrative workload without generating additional revenue.
Compliance and IT System Updates:
Software, rating engines, and policy documents must be modified to reflect the changes, mirroring the costly and complex transition seen in 2018.
Policyholder Communication:
Insurers will need to clearly explain how the VAT increase affects premiums, claims, and coverage to avoid confusion.
Mid-Term Policy Management:
Companies will face questions about how VAT adjustments will apply to existing policies, mid-term cancellations, and policy renewals.
Potential VAT Leakage:
Delays in settlements between insurers and reinsurers could create accounting discrepancies, requiring careful financial oversight.
The industry must be proactive in addressing these concerns to ensure a smoother transition than in 2018.
VAT means higher insurance premiums
How Private Policyholders Could Be Affected
For individuals, an increase in VAT means higher insurance premiums. Given the rising cost of living, many may struggle to maintain their current coverage levels. Some could be forced to:
- Downgrade their insurance plans
- Increase excess amounts to keep premiums affordable
- Cancel non-essential policies altogether
This creates a heightened risk of underinsurance, leaving many exposed to significant financial setbacks in the event of an accident or disaster.
Motor vehicle owners, in particular, will likely see repair and replacement costs rise further. The 2018 VAT increase already led to costlier repairs, and inflationary pressures in 2025-2026 could make car ownership even more expensive.
Securitas® Financial Group
The Impact on Business Policyholders
Businesses are not immune to the effects of a VAT hike. Increased operational expenses—including higher insurance premiums—could lead to:
- Reduced coverage or increased self-insurance
- Higher deductibles to manage costs
- Price hikes are passed onto consumers, adding to inflationary pressures
- Profit margin reductions, potentially leading to downsizing or closures
Companies with fleet, property, or liability insurance may face particularly sharp premium increases. To remain competitive, business owners will need to reassess their risk management strategies and insurance portfolios.
VAT increase approaching
Navigating Uncertainty: The Role of Financial Advice
With another VAT increase approaching, strategic financial planning is more important than ever. Whether you’re an individual policyholder or a business owner, working with a knowledgeable financial advisor can help you:
- Evaluate cost-effective coverage options
- Adjust policies to maintain necessary protection without unnecessary expenses
- Plan ahead for the financial impact of rising insurance costs
Preparation is key. As South Africa moves closer to these tax changes, now is the time to assess your financial position and make informed decisions.
If you found this article insightful, you may also be interested in reading The Importance of Medical Aid Amidst NHI Delays.
