Novated lease vs salary sacrifice: How it affects your take-home pay
The net disposable income from a novated lease arrangement varies by salary, car value, and employee contributions; the ATO example for a $65,000 salary shows a range from $41,612 to $43,593.
Novated lease vs salary sacrifice: What's the difference?
Salary sacrifice (also called salary packaging) is an arrangement where you and your employer agree to swap part of your pre-tax salary for benefits of similar value. A novated lease is a specific type of salary sacrifice for a car – typically a three-way agreement between you, your employer, and a leasing company. The key difference is that a novated lease involves a car and its running costs, while salary sacrifice can cover many benefits such as super, laptops, or childcare.
Both reduce your taxable income, but the net effect on your take-home pay depends on how fringe benefits tax (FBT) is handled. The Australian Taxation Office explains that your employer must pay FBT on most packaged benefits, and they may ask you to make an employee contribution to reduce that tax .
How a novated lease affects your take-home pay
To see the real impact, consider the ATO's example for Sam, who earns $65,000 annually and wants a car worth $35,000 with running costs of $11,500. The table below compares three scenarios:
| Scenario | Taxable income | Income tax + Medicare | Net disposable income |
|---|---|---|---|
| No salary sacrifice | $65,000 | $11,588 | $41,912 |
| Car without employee contributions | $47,647 | $6,035 | $41,612 |
| Car with employee contributions of $7,000 | $60,855 | $10,262 | $43,593 |
Without employee contributions, the net disposable income is slightly lower than no packaging. But with employee contributions, Sam ends up with $43,593 – $1,681 more than the no-packaging scenario. This shows that making employee contributions can make a novated lease worthwhile.
The role of FBT and employee contributions
FBT is calculated on the taxable value of the car fringe benefit. In Sam's case, the taxable value is $7,000 (20% of $35,000). If no employee contribution is made, the employer pays FBT of $13,208 (the taxable value grossed up by 1.8868). That cost is passed back to Sam through a higher salary sacrifice amount ($17,353). When Sam makes an employee contribution of $7,000 (equal to the taxable value), the FBT is eliminated, and the salary sacrifice drops to $4,145. The result is a higher net disposable income.
notes that employers will only offer salary packaging if it's tax-effective for both parties, and that FBT is payable at the highest marginal rate plus Medicare levy .
Comparing to the national minimum and full-time ordinary time earnings
The national minimum wage from 1 July 2026 is $26.44 per hour and $1,004.90 per week, which equates to about $52,255 annually. Full-time adult ordinary time earnings (excluding overtime and employer super) average $2,083.70 per week or $108,352 per year, according to the ABS. Sam's $65,000 salary sits between these benchmarks. For someone on the minimum wage, salary sacrificing a car may leave too little disposable income, while someone on average full-time earnings might see greater benefits from the tax savings.
Medicare levy and thresholds
The Medicare levy is 2% of your taxable income, but there are lower thresholds for singles: $28,011 and $35,013. If your taxable income is below $28,011, you pay no Medicare levy; between $28,011 and $35,013, the levy is phased in at 10 cents per dollar over the lower threshold. Full-time salaries like Sam's pay the full 2%. A novated lease reduces taxable income, which could push you closer to these thresholds, potentially reducing your Medicare levy.
Other considerations
Salary sacrificing into super is another popular option. Contributions are taxed at 15% within the fund, and they count towards the concessional cap of $32,500 (including your employer's super guarantee). Unlike a car, super contributions are not subject to FBT. You can also combine strategies, but be aware that salary sacrifice reduces your super guarantee base – your employer must still pay the 12% super on your original salary, not the sacrificed amount.
Impact on government benefits and loans
A lower taxable income from salary sacrifice can reduce your Medicare levy surcharge (if applicable), lower compulsory repayments for study or training loans, and affect child support or Family Tax Benefit. The ATO warns that reportable fringe benefits (like the car's grossed-up value) appear on your income statement and may be counted for some benefits.
Summary
A novated lease is a type of salary sacrifice that can boost your take-home pay if structured with employee contributions. The ATO example shows a gain of about $1,681 on a $65,000 salary. However, the outcome depends on your income, the car's value, and whether you can make employee contributions. Always compare the net disposable income after all costs, and consider how it affects your super, Medicare levy, and government benefits. For more details, see our guides on Salary packaging and Take-home pay.
Questions
Does a novated lease reduce my taxable income?
Yes, a novated lease is a form of salary sacrifice where you agree to receive less pre-tax salary in exchange for your employer providing a car and covering running costs. This lowers your taxable income, so you pay less income tax and Medicare levy. However, your employer may need to pay fringe benefits tax (FBT) on the car benefit, which can affect the overall savings.
Is a novated lease always better than salary sacrificing other benefits?
Not necessarily. The benefit depends on your income, the type of benefit, and whether you make employee contributions to reduce FBT. For example, salary sacrificing into super is often tax-effective because contributions are taxed at 15% instead of your marginal rate. A novated lease can be worthwhile if the FBT is managed with employee contributions, but you should compare the net disposable income after all costs.
How does a novated lease affect my super and government benefits?
Salary sacrificed super contributions are additional to your employer's super guarantee and count towards the concessional contribution cap ($32,500 for 2026–27). A novated lease does not directly affect super, but the reduced taxable income may lower your super guarantee (calculated on your reduced salary). It can also affect the Medicare levy surcharge, study loan repayments, and some government benefits like Family Tax Benefit.