How a Novated Lease could be equivalent to getting a Pay Rise
In today’s entry, I’m going to explain a novated lease and the potential financial advantages for you if you buy your next car using a novated leasing arrangement. A novated lease is an arrangement between you, your employer and your finance provider. Your employer agrees to meet the vehicle payments and then takes the money out of your pre-tax dollars before then having the tax deducated and giving you the rest.
The big advantage with a novated lease is that you get to save money by buying your vehicle with pre-tax dollars rather that post tax dollars. Let me illustrate.
Assume you earn $1,000 per week before tax and your tax rate is 30%. Therefore, you would now take home $700. Now assume you pay $200 per week for your car. That leaves you with $500 per week for your other expenses.
Now assume that you buy the same car through a novated leasing arrangement. You still earn $1,000 per week and your employer would deduct the $200 car payment leaving you with now $800 of taxable income. Apply the 30% tax means that you now pay $240 tax (as opposed to $300 above) leaving you with $560 for your other expenses. In other words, buying your car through a novated lease rather than a conventional loan is equivalent to giving yourself a pay rise, in this example of over 10%. Nice! For those of us who are visual, I’ve included a table below to explain it.
| Conventional Car Purchase | Novated Lease | ||
|---|---|---|---|
| Weekly Income | $1,000 | Weekly Income | $1,000 |
| Tax rate | 30% | Car Payment | $200 |
| Amount Paid in Tax | $300 | Amount Left | $800 |
| Amount Left After Tax | $700 | Tax Rate | 30% |
| Car Payment | $200 | Amount paid in tax | $240 |
| Net Amount | $500 | Net Amount | $560 |
So as you can see, by simply reversing the order of when you pay tax vs when you deduct your car payments (which is all a novated lease does), you can end up with the equivalent of a pay rise. In this example, the pay rise was over 10% without having to work any harder. Now you know why I’m such a fan of novated leases.
