South Africa’s compulsory VAT registration threshold will rise from R1 million in taxable turnover to R2.3 million, a major adjustment aimed at reducing compliance strain on smaller businesses and removing what many entrepreneurs have described as a growth trap. Finance Minister Enoch Godongwana announced the change in the 2026 Budget Speech, describing it as a response to long-running calls that the R1 million threshold no longer reflects the cost of doing business.
National Treasury confirmed the new threshold and set out the effective date, stating that VAT registration thresholds will be effective from 1 April 2026. Treasury also confirmed a second, related change, raising the voluntary VAT registration threshold from R50 000 to R120 000, while keeping the upper limit aligned to the new compulsory threshold.
The changes are expected to reshape VAT decisions for thousands of firms that currently sit between R1 million and R2.3 million in turnover, especially in consumer-facing industries where VAT registration can add administration without always improving competitiveness.
What is changing and when
The budget proposal introduces two key threshold changes:
- Compulsory VAT registration: increases from R1 000 000 to R2 300 000 in taxable turnover.
- Voluntary VAT registration: increases from R50 000 to R120 000 (with voluntary registration still capped below the compulsory threshold).
SARS has updated its VAT guidance to reflect the new budget position, stating that vendors making taxable supplies of more than R2.3 million must register and that businesses above R120 000 and below R2.3 million can apply for voluntary registration.
Treasury’s timeline indicates the change is intended to take effect from 1 April 2026, which typically aligns with the start of the tax year for many administrative measures.
Why government raised the VAT threshold now
The VAT registration threshold had been fixed at R1 million since 2009, despite inflation and significant increases in operating costs such as rent, wages, fuel, and compliance overheads. Moonstone Information Refinery notes that if the threshold had been adjusted with inflation over time, it would likely have been in the region of about R2.2 million, close to the new level announced in Budget 2026.
This matters because VAT registration can become a tipping point for small firms. Once registered, a business must submit VAT returns, manage tax invoices, maintain VAT accounting records, and comply with SARS audit and verification processes. For some small operations, especially owner-managed firms, that effort can be disproportionate to the benefit.
Treasury has framed the threshold changes as part of a broader package to support small businesses, including aligning the turnover tax threshold to R2.3 million and adjusting other limits.
Who benefits and who may not
Businesses most likely to benefit
The threshold increase is likely to be welcomed by businesses that sell mainly to the public, such as:
- small retailers and online sellers
- salons, beauty, and personal services
- small construction and maintenance contractors
- local hospitality and food outlets
- independent professionals serving individuals rather than corporates
For these businesses, VAT registration can sometimes force a pricing decision. Either prices rise when VAT is added, or margins shrink when the business absorbs VAT to keep customer prices stable. A higher threshold gives more room to grow before that trade-off becomes unavoidable.
Businesses that may prefer to stay VAT registered
Not all businesses will see the threshold increase as a reason to deregister. A firm that sells mainly to VAT-registered customers may prefer to remain registered because VAT clients can often claim input VAT, making a VAT invoice part of standard procurement.
Some businesses may also benefit from input VAT claims on expenses and capital purchases. If a business invests heavily in equipment, vehicles that qualify, or stock, VAT registration can improve cash flow because input VAT can be claimed, subject to SARS rules.
For that reason, the new threshold is best understood as expanding choice rather than forcing a single outcome.
How the new thresholds work in practice
South Africa’s VAT rules focus on taxable supplies, not total income. Taxable supplies generally include standard-rated supplies and zero-rated supplies, while exempt supplies are treated differently for VAT purposes. SARS summarises the VAT framework and explains that VAT is charged on taxable supplies by registered vendors, with some supplies zero-rated or exempt.
A practical way to think about the new rules is:
- If taxable supplies exceed R2.3 million in a 12-month period (or are expected to), VAT registration becomes compulsory.
- If taxable supplies exceed R120 000 but do not exceed R2.3 million, voluntary registration may be available, subject to SARS conditions.
Businesses close to the new threshold will likely need stronger monthly tracking, since crossing the line can trigger compulsory registration requirements.
The key decision for existing VAT vendors between R1m and R2.3m
A large group of businesses are already VAT registered because they crossed the old R1 million threshold. Under the new system, some of these firms may consider deregistration if their taxable turnover remains below R2.3 million.
That choice has risks and costs.
Exit VAT and final-period obligations
SARS guidance on cancellation of VAT registration warns that when a vendor ceases to be an enterprise, output tax on certain assets on hand at the date of ceasing must be declared in the final VAT return.
In practical terms, a business that deregisters may face an “exit VAT” charge on assets where input VAT was previously claimed, depending on the circumstances. This is one reason professional advisers are cautioning businesses not to treat deregistration as automatic or cost-free.
Input VAT loss and pricing implications
Deregistration also means the business can no longer charge VAT or claim input VAT on expenses. A business that remains VAT registered can still recover VAT on many operating inputs, subject to the rules. The decision becomes a pricing and margin calculation, not only a paperwork decision.
Customer expectations
In B2B markets, some customers expect a VAT number as part of supplier onboarding. Losing VAT registration can trigger procurement barriers, even if the supplier remains competitive.
What to expect next from SARS and Treasury
The Budget Speech and Budget Review set out policy intent and effective dates, while the detailed legal changes are typically implemented through tax legislation and SARS administrative updates. Treasury’s Budget Review clearly lists the proposed thresholds and the effective date for VAT registration thresholds as 1 April 2026.
SARS has already updated its VAT information page to reflect the new thresholds as a “What is new?” item linked to the National Budget.
Businesses can expect follow-up guidance explaining:
- how SARS will handle transition for firms that are already registered
- what evidence SARS may require for voluntary registration under the higher R120 000 threshold
- whether any administrative thresholds, return categories, or vendor obligations change alongside the registration thresholds
What businesses should do before April
Most small firms will not need to change anything immediately, but those near key thresholds should take steps to avoid compliance surprises:
- Calculate taxable turnover, not total income
Confirm which revenue streams are taxable, zero-rated, or exempt. - Track the rolling 12-month position
VAT registration thresholds are typically applied over a 12-month period, so monthly monitoring is essential for fast-growing firms. - Review contracts and pricing
Businesses close to R2.3 million should confirm whether pricing is VAT inclusive or VAT exclusive in customer agreements. - Consider the cost of deregistration before making changes
Firms already registered should assess potential output tax on assets and working capital effects before applying to cancel VAT registration. SARS notes that output tax on certain assets must be declared for the final period when ceasing to be an enterprise. - Engage a tax practitioner if the business is asset heavy
Businesses with vehicles, machinery, or substantial stock should get a scenario analysis before deciding on deregistration.
Why this change matters for the wider economy
VAT registration thresholds affect more than tax compliance. They influence:
- whether small firms feel safe scaling turnover beyond a perceived “tax wall”
- whether informal or micro businesses decide to formalise
- pricing and competitiveness in sectors where customers are price sensitive
- administrative load on SARS and on small business owners
By lifting the compulsory threshold, Treasury is signalling an attempt to reduce friction for smaller firms at a time when growth and employment remain priorities. At the same time, the higher voluntary threshold suggests government also wants to reduce cases where very small firms register voluntarily but struggle to maintain compliance.
