Ultimate Guide to Novated Lease Salary Sacrifice: Save on Your Next Car
Are you looking for a smarter way to finance your next car purchase? A novated lease salary sacrifice may be just the solution you need to reduce your taxable income and make car ownership more affordable.
In this ultimate guide, we’ll walk you through everything you need to know about how a salary sacrifice car lease works, its benefits, and how it can save you money in 2025.
What is a Novated Lease Salary Sacrifice?
A novated lease salary sacrifice is an agreement between you, your employer, and a leasing provider. With this arrangement, your employer makes payments for your car directly from your pre-tax salary.
This reduces your taxable income, providing significant tax savings and potentially lowering the cost of owning a car.
Through a novated lease, you have the opportunity to lease a car while covering all vehicle-related expenses, including running costs like fuel, insurance, and maintenance, all deducted from your pre-tax income.
The beauty of this arrangement lies in the simplicity and the financial benefits it offers.
How Does a Novated Lease Salary Sacrifice Work?
Novated leasing is an employee benefit offered through salary packaging, where you can lease a new or used car.
Here's how the process works:
Choose Your Vehicle: Select a vehicle based on your budget and preferences.
Lease Agreement: A lease agreement is signed with a finance provider, while your employer agrees to deduct payments directly from your pre-tax income.
Vehicle Running Costs: The lease can cover fuel, insurance, registration, servicing, and maintenance.
End of Lease: At the end of the lease term, you have the option to buy the car through a balloon payment or return it and choose a new one.
This system works by reducing your taxable income because the payments are deducted before tax, saving you money.
Key Benefits of Novated Lease Salary Sacrifice
Here are the key benefits of a novated lease salary sacrifice:
1. Tax Savings
The biggest advantage of a novated lease is the tax savings. Since the lease payments are deducted from your pre-tax salary, your taxable income is lowered. This means you pay less income tax, putting more money back into your pocket each pay cycle. Additionally, for eligible electric vehicles (EVs), the fringe benefits tax (FBT) is exempt, further boosting your savings.
2. Fleet Discounts and Bulk Buying Power
When you lease through a novated lease provider, you get access to fleet pricing, which can save you money on both the vehicle's purchase price and ongoing running costs. Providers often negotiate bulk buying discounts, meaning you could pay less for your car and enjoy reduced service and maintenance costs.
3. Convenience and Budget Management
A novated lease simplifies budgeting by consolidating all your car-related expenses into one regular deduction from your salary. This reduces the hassle of managing multiple bills for fuel, insurance, and maintenance. It’s a “cashless” motoring solution that provides ease and predictability, allowing you to plan your finances more effectively.
4. EV Salary Sacrifice Benefits
Choosing an eligible EV for your novated lease means you'll be exempt from fringe benefits tax (FBT), making it an even more cost-effective way to go green. With the increasing availability of electric vehicles in the market, you can drive a sustainable vehicle while enjoying significant tax advantages.
Novated Lease Salary Sacrifice Vs. Car Loan vs Paying Cash
Let’s compare the novated lease salary sacrifice option with a traditional car loan and paying upfront in cash.
Novated Lease: Payments are made from pre-tax income, reducing your taxable income. You can also bundle running costs into one payment, making budgeting easier.
Car Loan: Interest rates apply, and payments are made after tax. The car becomes an asset that may depreciate over time.
Paying Cash: Full upfront payment for the car, but you miss out on tax savings and the financial flexibility that comes with a novated lease.
How Novated Leasing Works for Electric Vehicles (EVs)
Novated leases are a great option for those looking to lease an electric vehicle. With the added benefit of FBT exemptions for eligible EVs, you could save more by salary sacrificing your EV. Here’s why an EV novated lease makes sense:
Tax Exemptions: EVs are exempt from FBT if they fall under the luxury car tax threshold, making them a tax-efficient option.
Reduced Running Costs: EVs have lower fuel costs compared to petrol or diesel cars, and many electric vehicles are included in novated lease packages, reducing your overall expenditure.
How Does Salary Sacrifice Work for a Car?
Salary sacrifice allows you to pay for your car directly from your pre-tax income. You’ll agree with your employer to have a portion of your salary deducted, which is then used to pay for your vehicle and its associated costs.
Tax Implications of Salary Sacrifice Car Leasing
Salary sacrificing a car through a novated lease can reduce your taxable income, which means you’ll pay less tax. The savings on your taxes depend on your salary and the vehicle you choose.
Novated Lease Salary Sacrifice for New and Used Cars
A major advantage of novated leasing is the flexibility to lease both new and used cars. Whether you’re looking for a new car with the latest features or a used vehicle that fits within your budget, novated leasing provides options that suit your needs.
Novated Lease Flexibility
One of the main attractions of novated leasing is its flexibility. If you change jobs during the lease term, you can transfer the lease to your new employer (if they agree), or you can take over the lease and pay from your after-tax income. This flexibility ensures you won’t be locked into a financial commitment that is difficult to manage if your employment situation changes.
Considerations Before Opting for a Novated Lease Salary Sacrifice
While novated leasing offers significant advantages, there are a few considerations:
Employment Dependency: If you change jobs or leave your employer, you may be required to continue payments out of your after-tax income.
Long-Term Commitment: A novated lease typically lasts from two to five years, so you’ll need to ensure your financial situation is stable for that period.
Get the Most from Your Car Lease
A novated lease salary sacrifice can save you money on your next car by reducing tax and simplifying car ownership.
Whether you’re looking for a new or used vehicle, an electric vehicle, or a fleet discount, the flexibility and financial benefits of a novated lease make it an attractive option. At Novated Finance Australia, we provide tailored novated lease solutions to help you drive away in the car you’ve always wanted, with significant savings.
Ready to reduce your car costs? Get a quote today to see how much you can save with novated leasing!
Frequently Asked Questions (FAQs)
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A novated lease salary sacrifice is an agreement where your employer makes payments for your car directly from your pre-tax salary, reducing your taxable income and providing tax savings.
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Salary sacrifice allows you to use your pre-tax income to lease a vehicle, covering both the car’s payments and running costs like fuel and insurance.
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Yes, you can choose both new and used cars, with the flexibility to lease the car that best suits your needs.
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If you change employers, you can transfer your novated lease to the new employer or continue paying it with after-tax income.