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Medicare levy and surcharge: who pays what

Medicare is funded through two separate taxes: the Medicare levy (2% of taxable income, paid by most Australians) and the Medicare Levy Surcharge (MLS, paid by higher earners who don’t hold appropriate private hospital cover). Understanding both is essential for mid-to-high income earners deciding whether to carry private health insurance.

The Medicare levy (2%)

Applied to most residents’ taxable income at 2%. Administered through PAYG withholding and annual tax return.

Full exemption available for very low income earners. Reduction available for those earning below thresholds.

2025-26 thresholds (indicative):

  • Under $24,276 (single): exempt
  • $24,277 - $30,345: phased-in rate
  • Above $30,345: full 2%
  • Family thresholds apply for couples and those with dependents

The Medicare Levy Surcharge (MLS)

Applied to higher income earners who do not hold an appropriate private hospital insurance policy. The surcharge rates (2025-26):

  • Tier 1 ($97,001 - $113,000 single / $194,001 - $226,000 family): 1%
  • Tier 2 ($113,001 - $151,000 single / $226,001 - $302,000 family): 1.25%
  • Tier 3 ($151,001+ single / $302,001+ family): 1.5%

Family thresholds increase by $1,500 for each dependent child after the first.

What “appropriate” private hospital cover means

To avoid MLS, you need private hospital cover (not just extras/ancillary) that:

  • Is issued by a registered health insurer
  • Has an excess of $750 or less for singles / $1,500 or less for couples/families
  • Covers you continuously throughout the tax year

Policies with higher excesses, hospital-extras-only policies, or travel insurance do not satisfy MLS.

The decision math

For a single earner at $120k (Tier 2, 1.25% MLS):

  • Without private cover: 1.25% of $120k = $1,500 in MLS
  • Cheapest Medicare-qualifying private hospital policy: approximately $1,200-$1,600/year (single, basic tier)

For someone at $120k, the MLS and the insurance cost are roughly similar. The decision hinges on whether the insurance provides genuine value beyond the MLS avoidance.

For a higher earner at $180k (Tier 3, 1.5% MLS):

  • Without cover: 1.5% of $180k = $2,700 in MLS
  • Basic policy: $1,200-$1,600/year

The economic case for insurance strengthens at higher incomes.

For a family at $250k (Tier 2, 1.25% MLS):

  • Without cover: 1.25% of $250k = $3,125 in MLS
  • Family basic policy: $2,500-$3,500/year

Marginal decision at this income level.

The Lifetime Health Cover loading

LHC adds a separate consideration: if you take out private hospital cover after age 31, an additional 2% loading applies for each year over age 30 (up to 70% maximum). The loading is removed after 10 years of continuous cover.

Example: taking out cover at age 40 adds a 20% loading. Taking out at age 55 adds 50% loading. At age 50 starting cover: 40% loading.

For individuals under 31, LHC does not apply. For those in their early 30s, it’s building at 2% per year.

Strategic timing of private cover

For a 29-year-old currently without private cover:

  • Taking cover before 31st birthday avoids LHC loading entirely
  • Taking after adds 2% per year of loading

For a high earner already paying MLS:

  • Take out cover immediately; MLS and LHC loading can both be eliminated
  • The 6% rule: you need the cover for at least 12 months in that tax year to avoid MLS

The family thresholds

Family thresholds apply to couples with or without children, not just those with dependents:

  • Married or de facto for the full tax year
  • Combined income for threshold calculation

A couple with combined income $195,000 (just over the family Tier 1 threshold) might consider:

  • Separate private cover policies (usually more expensive than couple cover)
  • Joint couple private cover (typically cheaper)
  • Threshold management - one spouse salary sacrificing super to bring combined income below threshold

Hidden interactions

Super contributions impact MLS threshold: Concessional super contributions reduce your income for MLS purposes. Sacrificing $10k to super at a $100k income can reduce MLS-test income to $90k, potentially dropping you out of Tier 1 ($97k threshold).

Reportable fringe benefits: for MLS and other government payments, “reportable fringe benefits” are added to your income. Salary-packaged vehicles or meal allowances may push you over thresholds you didn’t anticipate.

Rebates for private cover: the Australian Government Rebate on private health insurance reduces the cost of eligible policies. The rebate itself is income-tested - higher earners get a smaller rebate, making the policy more expensive precisely when the policy is most necessary.

The insurance value beyond MLS

Private hospital cover provides:

  • Choice of doctor and hospital
  • Shorter waiting times for elective procedures
  • Access to private rooms
  • Some procedures not available in the public system

These values matter differently across individuals and life stages. For young, healthy single earners, the insurance is primarily MLS avoidance and LHC protection. For families planning births, older individuals with chronic conditions, or anyone anticipating elective surgery, the insurance value beyond MLS is substantial.

The annual decision

Every year, revisit your private cover:

  • Compare actual premium paid vs MLS you would pay without
  • Check for policy updates or rebate-tier changes
  • Consider whether a cheaper policy would still qualify you (same excess thresholds)
  • Confirm LHC status and any loading changes

For most earners above $97k without private cover, purchasing appropriate private hospital cover is net-positive on tax-economic grounds. Below $97k, the decision is about the insurance value, not MLS.