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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 running costs at the beginning does not, by itself, create 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 4.2c/km 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 over-budgeted running costs 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”.

This is the same anchoring error discussed in why “tax saved” is misleading.

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 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.

The novated lease calculator separates vehicle costs from running costs for this exact reason.

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.

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  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 (post tax) could otherwise have reduced a home loan offset balance and saved some interest. For most people and typical budgeting errors, this effect is minor. ↩