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Running cost budgets are a “piggy bank”

One of the most common misconceptions about novated leases is how running costs budgeting and claiming actually work.

People often think:

  • the novated lease company is charging them,
  • or that there’s some fixed amount they are forced to spend,
  • or that unused money somehow disappears.

None of that is true.

Running costs budgeting in a novated lease is best thought of as a piggy bank funded with your pre-tax income.

Over- or under-budgeting the running cost in the beginning does not by itself lead to losses at the conclusion of the lease. 1

What you give the leasing company at the start: just a budget

At the beginning of a novated lease, what you tell the leasing company is not a bill and not a commitment.

It is simply a budget.

That budget might be based on:

  • kilometres driven,
  • servicing,
  • insurance,
  • tyres,
  • charging,
  • etc.

For example, if you tell them you expect to drive 25,000 km per year, and you’re using the ATO shortcut method:

  • 25,000 × $0.042 = $1,050 per year

That translates to:

  • $1,050 ÷ 26 fortnights ≈ $40.39 per fortnight

Each fortnight, what actually happens is very simple:

The novated lease company takes $40.39 of your pre-tax income and sets it aside.

That’s it.

No spending has happened yet.

When you make a claim

Over time, this pot of money slowly grows.

You can think of it literally as a pre-tax piggy bank.

At some point, you decide to claim.

Say after one quarter, you submit two odometer photos showing:

“I’ve driven 6,000 km since the last claim.”

They then do the arithmetic:

  • 6,000 × $0.042 = $252

They:

  • open the piggy bank,
  • take $252 out,
  • and send it to your bank account.

That’s it. No interest is charged on the running costs.

Under-budgeting and over-budgeting are not a big deal

Because this is just a budget, it is very common to get it wrong at the beginning.

And it really doesn’t matter much.

If you under-budget

If you find that:

  • you’re driving more than expected, or
  • you have an unexpectedly large claim (e.g. a flat tyre costing $400), and
  • your piggy bank isn’t keeping up,

you can simply ask the novated lease company to:

  • increase the ongoing contribution,
  • do a one-off top-up, or
  • spread the adjustment over several pays.

If you over-budget

If you end the lease with money still sitting in the piggy bank:

  • that money is not lost,
  • it is refunded to you.

Because it flows back through payroll, it will be taxed at that point (as normal income), but economically it is still your money.

Over-budgeting just means you temporarily parked too much pre-tax money in the piggy bank.

Importantly, the overbudgeted running cost can't be used to pay down the residual value of the car, as this has to be paid with post-tax dollars.

What running costs are not

Running costs are not:

  • a fee you are forced to spend,
  • a loan,
  • something that attracts interest,
  • money the novated lease company keeps if you don’t use it.

They are simply pre-tax money set aside and reimbursed later.

When the wrong budget becomes practically problematic

While under- or over-budgeting running costs is mechanically harmless, it can become problematic in one specific way:

when people start treating the running-cost budget as if it were the true cost of owning the car.

This usually happens like this:

  • someone sets an unrealistically low running-cost budget at the start (whether by themselves or using default figures by the novated lease provider),
  • their take-home pay looks great,
  • and they mentally anchor to that number as “what the car costs me”.

For a while, everything feels fine because the piggy bank is quietly being under-funded relative to reality.

The issue only appears later, when they need to use the money and find that they don't have enough.

When reality forces a correction

Eventually, one of the following happens:

  • higher-than-expected mileage,
  • an expensive service or tyre replacement,
  • rising insurance premium etc.

At that point, the novated lease company will require the budget to be corrected via:

  • higher ongoing deductions,
  • a lump-sum top-up,
  • or a combination of both.

People often experience this as:

“My novated lease suddenly got more expensive.”

It is important to note that this is an expectation problem, not a novated-lease structure problem.

The same issue would have arisen if you bought the car upfront thinking that the insurance premium would always be $1,500 per year, only to be shocked when it rose to $2,000 the next year.

If someone has mentally committed to a car based on an unrealistically low running-cost budget, the later correction can feel painful.

A practical takeaway

A sensible approach is to:

  • set a realistic running-cost budget upfront,
  • treat it as a planning estimate rather than a promise,
  • and understand that later adjustments are not penalties but simply reconciliation.

People should anchor their novated-lease calculations primarily on the vehicle cost component, since that is the fixed financial cost determined upfront. Running costs should be treated as a separate, variable consideration.

Key takeaway

If you remember nothing else:

Running costs in a novated lease are just a pre-tax piggy bank.

You estimate > Money gets set aside > You claim what you actually use.

If you get the estimate wrong, you adjust it as you go.

Optional Support

Both this guide and the spreadsheet are free. If they prove helpful, consider:

  1. In theory, significant and prolonged over-budgeting can carry a small opportunity cost. For example, if $10,000 sat in the running-cost “piggy bank” for an extended period, that money could otherwise have reduced a home loan offset balance and saved some interest. For most people and typical budgeting errors, this effect is minor. ↩