UNDERSTANDING PRE TAX VS POST TAX DOLLARS

March 9, 2017

Nobody likes spending more money than they have to. After all, you work so hard to get money in the door, the last thing you want is to watch it leak back out unnecessarily.

To reduce needless expenditure, many of us look for ways to cut our costs. We search for bargains, wait for sales, haggle with salespeople and the like. That’s all great, and it’s smart to make sure you’re always getting the best deal.

The only problem is, the money we are using is usually post tax dollars.

By making purchases – such as buying a new vehicle – with pre-tax dollars, there’s a real opportunity to save money and keep more of your hard earned in your own back pocket.

If you’re not completely sure of the difference between pre-tax and post-tax, it’s worth understanding the terms a little more.

 

WHAT DOES PRE TAX MEAN?

When an employee gets paid, there can be numerous deductions that get taken out of their pay before tax is calculated. These deductions usually include things like voluntary payments to super, or salary sacrifice items.

Once these amounts have been deducted from your gross pay, the government then calculates the tax payable. The smaller the amount you have earned, the smaller the amount you are taxed. Using pre-tax dollars to buy things saves you money by reducing the amount you are taxed.

 

WHAT DOES POST TAX MEAN?

If you earn the money, pay income tax on it, and then deposit it into some type of account, or buy an investment with it, you have used after-tax dollars.

 

NOVATED LEASING AND PRE TAX DOLLARS

A Novated Lease is a financial agreement between you, your employer and the finance company used to finance the car purchase. The finance company lends you money to purchase your car, and your employer arranges to have your regular lease repayments deducted directly from your pay. Your running costs and part of the lease payments are deducted from your pre-tax salary and this reduces your taxable income, saving you money.  It’s all about you paying less tax.

When finance payments and vehicle running costs are deducted from your gross salary, you effectively pay less tax. This means you have more disposable income.

In contrast, a normal car loan is paid using your post-tax salary, meaning whatever is left in your bank account after you’ve paid tax.

The government doesn’t give much away for free, however, so they will charge Fringe Benefit Taxes (FBT) on your Novated lease. That’s because the government considers the act of your employer taking money from your pay and giving you a car in return for your use to be a fringe benefit.

One way to reduce the amount of FBT you will need to pay is to make a percentage of your contributions to your repayments using post tax dollars. For every after tax dollar that you contribute, you reduce the amount of FBT you need to pay by that same amount.