How Does a Novated Lease Work? Simple Explanation + Calculator

19 March 2026|8 min read

Plain-English explanation of how novated leases work in Australia, with step-by-step guide, diagrams concept, and links to free calculators to model your savings.

What is a novated lease in plain English?

A novated lease is a way to pay for a car using your pre-tax salary, which means you pay less income tax. Here is how it works in simple terms. You choose a car, a finance company buys it for you, and your employer deducts the lease payments and running costs from your salary before tax is calculated. The word 'novated' comes from 'novation,' which means transferring an obligation from one party to another — in this case, your employer takes on the obligation to make payments to the finance company on your behalf, using your salary. There are three parties involved: you (the employee), your employer, and the leasing company. You choose the car and drive it. Your employer deducts payments from your pay. The leasing company owns the car during the lease and handles the finances. At the end of the lease, you can buy the car outright by paying the residual value, start a new lease on a different car, or hand the car back. The key benefit is the tax saving — because the payments come from pre-tax salary, your taxable income is lower, so you pay less income tax. On top of this, you save the GST on the car purchase price and running costs (approximately 9.1% of the total cost), and for electric vehicles, the FBT exemption means there is no fringe benefits tax liability either.

Step 1: Check if your employer offers novated leasing

Not every employer offers novated leasing, but most medium and large employers do. Start by asking your HR or payroll department. If your employer already has a salary packaging provider (such as SG Fleet, Maxxia, LeasePlan, SmartGroup, Eziway, or Fleetcare), they can set up a novated lease for you. If your employer does not currently offer novated leasing, it is worth asking them to consider it. It costs the employer nothing — the salary packaging provider handles all the administration, and the employer simply deducts the agreed amount from your pay each cycle. Many employers are willing to set it up when an employee requests it, especially since it is seen as an employee benefit that helps with recruitment and retention. Some things to note: you typically need to be a permanent full-time or part-time employee. Casual employees usually cannot access novated leases. Fixed-term contract employees may be eligible if the contract is 12 months or longer. There is no minimum salary requirement, but the tax savings are proportionally greater at higher salaries because of marginal tax rates — our Tax Calculator can show you exactly what bracket you fall in.

Step 2: Choose your car and get a novated lease quote

Once you know your employer offers novated leasing, the next step is choosing a car and getting a quote. You can lease almost any new car (and some used cars under 3 years old), but the biggest savings in 2026 are on electric vehicles because of the FBT exemption. Contact your employer's salary packaging provider or use their online quoting tool to get an estimate. You will need to provide: the make, model, and variant of the car; the driveaway price; your preferred lease term (1–5 years, with 3 or 5 being most common); estimated annual kilometres (10,000, 15,000, or 20,000 km); and your gross annual salary. The quote will show you: total annual package cost (lease repayment plus bundled running costs), your pre-tax salary deduction per pay period, your estimated new take-home pay, and the residual value at lease end. Compare at least two providers if possible — interest rates and management fees vary, and a lower rate can save you $1,000–$3,000 over the lease term. Also check what running costs are included in the bundle. A good package includes comprehensive insurance, registration, servicing, tyres, roadside assistance, and fuel or charging costs. Some providers charge extra for items others include as standard.

Step 3: Understand pre-tax vs post-tax deductions

This is where novated leases get slightly confusing, but it is important to understand. Most novated lease providers use the Employee Contribution Method (ECM), which splits your lease payments into pre-tax and post-tax components. The pre-tax component reduces your taxable income — this is where the tax saving comes from. The post-tax component is a contribution you make from your after-tax salary to reduce or eliminate the FBT liability on the car. For electric vehicles with the FBT exemption, there is no FBT liability, so theoretically the entire amount could be pre-tax. However, in practice, most providers still structure a small post-tax component because of the way GST credits and running costs are administered. The key number to focus on is the total impact to your take-home pay — this is the amount your bank balance decreases by each pay period compared to having no novated lease. It accounts for both the pre-tax and post-tax deductions, as well as the tax savings. Do not get hung up on the split between pre and post-tax — focus on the bottom-line take-home pay impact and compare that to what you would spend buying and running the same car without the lease. Use our Take Home Pay Calculator to model different salary sacrifice amounts and see the impact on your net pay.

Step 4: Compare novated lease vs buying outright or car loan

Before committing, run the numbers on all three options: novated lease, buying with cash, and buying with a standard car loan. Here is a simplified comparison for a $45,000 EV on an $80,000 salary. Option A — Novated lease (5-year term): total annual cost approximately $12,500 (pre-tax deduction), annual tax saving approximately $4,187, annual take-home pay impact approximately $8,313, total 5-year cost to you approximately $41,565 plus $12,656 residual = $54,221. Option B — Standard car loan (5-year, 7.5%): monthly repayment $903, annual running costs approximately $3,500 (insurance, rego, servicing, charging), total annual cost from after-tax income approximately $14,340, total 5-year cost $71,700. Option C — Buying with cash: car price $45,000 upfront, annual running costs $3,500, total 5-year cost $45,000 plus $17,500 = $62,500, but you lose the opportunity cost of investing that $45,000. The novated lease saves approximately $17,479 over 5 years compared to a car loan, and is comparable to cash purchase when you factor in opportunity cost and the time value of the tax savings received each pay period. The novated lease also has the advantage of spreading the cost with no large upfront outlay.

Step 5: Sign the agreement and start driving

Once you have decided to proceed, the process is straightforward. You sign the novated lease agreement with the leasing company, your employer signs the novation deed (which authorises the salary deductions), and the leasing company purchases the car from the dealer. The car is registered in your name — you own the car for all practical purposes, even though the leasing company has a financial interest until the lease is paid off. Your employer begins deducting the agreed amounts from your salary on the next pay cycle. The bundled running costs (insurance, rego, servicing, etc.) are managed through a running cost account — money is set aside each pay period, and when you need to pay for insurance or get the car serviced, the funds come from this account. Some providers give you a fuel card for charging or petrol costs. The whole process from application to driving typically takes 2–4 weeks. Once set up, there is very little ongoing administration — your salary deductions happen automatically, running costs are managed by the provider, and you simply drive the car. At the end of the lease, you will be contacted about your options (pay the residual, re-lease, or return the car) well in advance so you can plan.

Common questions about novated leases answered

Can I choose any car? Yes, you can lease virtually any new passenger vehicle. Some providers also allow approved used vehicles under 2–3 years old. Do I need a deposit? No, most novated leases require zero deposit — the full driveaway price is financed. What is the residual value? The residual is the amount owing at the end of the lease, set by ATO guidelines as a percentage of the original price (e.g., 28.13% for a 5-year lease on a car under $91,387). You must pay this to own the car, or you can re-lease or return the car. Can I salary sacrifice running costs for a car I already own? Not through a novated lease, but some employers offer general salary packaging that allows salary sacrifice of some car expenses. Does the lease affect my borrowing capacity? Yes, lenders may count the novated lease as a commitment, though the impact varies — some lenders treat salary sacrifice favourably because it demonstrates financial management. Can I end the lease early? Yes, but there may be early termination fees. Check the terms before signing. What happens at tax time? Your employer's payment summary (now called income statement) reflects your reduced taxable income, so your tax return should be straightforward. The salary sacrifice amount does not need to be separately declared — it is already excluded from your reported income.

Calculate your novated lease savings now

The exact savings from a novated lease depend on your salary, the car price, the lease term, your location (which affects registration and insurance costs), and your driving habits. Rather than relying on generic estimates, model your specific scenario using our free calculators. Our Take Home Pay Calculator shows you exactly how salary sacrifice reduces your net pay — enter your gross salary, then subtract the annual novated lease cost to see your new take-home pay. The difference between your current take-home pay and the new figure is the actual cost of the novated lease to your bank account. Our Tax Calculator breaks down your income tax, Medicare levy, and marginal tax rate — essential for understanding how much tax you save per dollar sacrificed. And our Salary Sacrifice Calculator is specifically designed to show the before-and-after impact of salary sacrificing into super or other pre-tax arrangements, which operates on the same principle as novated lease deductions. For a personalised novated lease quote, contact your employer's salary packaging provider with the specific car details and your salary information. Compare at least two quotes, and always ask for the total take-home pay impact rather than just the pre-tax deduction amount.