What's the difference between salary sacrificing and a novated lease?

You’ve probably heard the term ‘salary sacrifice’ to describe the process of paying for your car via your salary, but if you’ve also heard the term ‘novated lease’, you might be wondering if these terms are interchangeable. This guide clears up the relationship between them, what the advantages are of salary sacrificing your car, and how it works.

First up, to clarify – when it comes to a vehicle, salary sacrificing and novated leasing are essentially the same thing; one is a type of the other. A novated lease is the salary sacrifice of a vehicle and its running costs.

Benefits of a novated lease: Why it’s worth salary sacrificing your car

When you take up a novated lease, there are a few advantages:

1. You can include your car and all of your vehicle running costs – fuel, rego, roadside assist, insurance, servicing – in one easy payment

2. This payment comes out of your gross (pre-tax) income, using cash that otherwise would go direct to the tax office and not to you (see how it works below); and

3. A novated lease lets you avoid paying GST – a 10% saving on your car and all running costs; and

4. If you get a new car, you can access wholesale (fleet) pricing to get a sizeable discount

Remember that, whilst your net income may be slightly lower with a novated lease, this is because your car and running costs are already taken care of. If you use a standard car loan, or pay for your car costs out of pocket, you’d be using your income after tax. Because a novated lease is paid first (before your tax), your taxable income is lower, so you therefore pay less tax – sometimes even thousands of dollars a year less.

What you can salary sacrifice and how it works

The salary sacrifice process is:

1. You choose a novated lease provider (if they aren’t offered by your employer, your chosen novated lease provider can guide your employer on setting them up easily). 

2. Your chosen provider will give you and your employer any paperwork to sign and guide your employer on the process, so they can pay for your car on your behalf.

3. Your employer makes your lease payments using your pre-tax (gross) salary, in the normal pay cycle. After that, your employer then pays your tax obligations and you receive your net (post-tax) salary the usual way. 

4. When your lease is nearly up, your novated lease provider will be in touch to let you know your options.

You can read more about the process in our article ‘How it works: Getting started with a novated car lease’. 

There are several different items that can be salary sacrificed, such as your laptop or phone, education courses, extra contributions to your super, and a host of others (you can find out more at the ATO website). And the good news is that anyone who is paid a salary can sacrifice a vehicle – as long as their employer offers novated leasing. 

Novated leasing costs an employer nothing and is actually very easy to set up (we have a useful employer guide with all the facts). You can suggest us to your employer if they aren’t set up and we can guide them through the process.

Salary packaging novated lease: Things to consider

If you’re keen to take up a novated lease and salary sacrifice your car, there are a few considerations:

1. Most importantly, you do need to have an employer and be paid via PAYG (which most people are). 

2. Your employer needs to be set up to provide novated leasing and offer your chosen provider.

If either of these disqualify you from a novated lease, you can still look into other forms of car finance, such as a chattel mortgage, finance lease or car loan. If you can’t get your employer onboard to offer novated leasing, we can help.