The Medicare Levy Surcharge (MLS) is an additional tax that applies to Australian taxpayers who earn over a certain income and don’t have private hospital cover.

Most Australian taxpayers pay the standard Medicare Levy, which is 2% of their income, but the MLS is imposed on higher earners without private hospital cover. Australian taxpayers are subject to the surcharge based on their income level and whether they hold private hospital cover, and the surcharge is assessed at tax time.

The surcharge is designed to encourage the use of the private system, helping to reduce pressure on the public system.

If you’re a taxpayer in Australia, understanding the MLS thresholds and how they impact your finances is essential.

This guide will walk you through everything you need to know about the Medicare Levy Surcharge, including income thresholds, how the surcharge is calculated, and ways to avoid paying it.

What Is the Medicare Levy Surcharge?

The Medicare Levy Surcharge is an additional tax that applies to individuals and families with higher incomes who do not have private hospital insurance. It’s designed to encourage individuals who can afford private health cover to take it out, reducing demand on the public healthcare system.

The surcharge is calculated as a percentage of your income, known as the MLS rate, and ranges from 1% to 1.5%, depending on your income level. Income thresholds and rates are set by the government and determine the surcharge amount for different income groups. This is in addition to the standard 2% Medicare Levy that most taxpayers already pay. The Medicare Levy is collected similarly to income tax through employer withholdings and is assessed when filing income tax returns.

Who Needs to Pay the Medicare Levy Surcharge?

The MLS only applies if your annual income exceeds specific thresholds. These income thresholds are updated annually, so it’s important to stay informed about any changes.

For the 2025-26 financial year, the income thresholds are as follows:

For families, the income threshold increases by $1,500 for each dependent child after the first. This means that if you have multiple children, your family income threshold will be higher before the surcharge applies.

For example, a family with two children will have a threshold of $202,000 before the MLS kicks in.

Understanding these thresholds is crucial for high-income earners to plan their finances and avoid unexpected tax liabilities. If your income is close to these thresholds, consider taking out private hospital cover to avoid the surcharge.

How Is Your Income for MLS Purposes Calculated?

Your income for MLS purposes includes more than just your taxable income. The Australian Taxation Office (ATO) uses a broader definition of income when determining whether you’re liable for the surcharge. This includes:

• Taxable income
• Reportable fringe benefits
• Superannuation contributions
• Any amount on which family trust distribution tax has been paid

All these components are added together to calculate your total income for MLS purposes. If this total exceeds the relevant threshold based on your situation (single or family), you may need to pay the surcharge.

How Can You Avoid Paying the Medicare Levy Surcharge?

Taking out private hospital cover is the main way to avoid the Medicare Levy Surcharge and avoid the Medicare Levy if your income is above the required threshold.

Here’s what you need to know about getting coverage:

• The policy must be with a registered health insurer.
• The excess on your policy should not exceed $750 for singles or $1,500 for families
• You need to hold hospital cover for the entire financial year if you want to be fully exempt and avoid paying any part of the surcharge.

If you only hold hospital cover for part of the year (for example, six months), you’ll only be exempt from paying the surcharge during that period. You may need to pay the MLS for any months where you didn’t have coverage, as the surcharge will apply proportionally for the uncovered period.

Benefits of Private Health Insurance

While private health insurance comes with its own costs (monthly premiums), you may be eligible for a private health insurance rebate, which can reduce the cost of your premiums depending on your income and family status. Private health insurance could also save you money in taxes if you’re a higher-income earner. For example:

• A single person earning over $151,000 without private hospital cover could end up paying an extra $2,265 in taxes due to the MLS. In this scenario, the individual pays the Medicare Levy Surcharge unless they have eligible hospital cover.

You can avoid paying this additional tax by taking out appropriate hospital cover before reaching these thresholds.

Why Does the Government Charge This Surcharge?

The Medicare Levy Surcharge was introduced as a way to encourage higher-income earners to take out private health insurance. By doing so, more people use private hospitals instead of relying solely on public hospitals.

This helps reduce pressure on Australia’s public healthcare system and ensures that resources are available as much as possible.

Key Takeaways

Understanding how the Medicare Levy Surcharge works can help you make informed decisions about your health insurance and tax obligations. Here are some key points:

• The MLS only applies if your income exceeds certain thresholds ($97,000 for singles or $194,000 for families).
• The surcharge ranges from 1% to 1.5%, depending on your income tier.
• The surcharge is assessed when you lodge your tax return.
• You can avoid paying it by taking out an approved private hospital insurance policy.

FAQs

What happens if I only have private health insurance for part of the year?

If you had private hospital cover for only part of the financial year (for example, six months), you’ll be exempt from paying the surcharge during that period. However, you’ll still need to pay it proportionally for any months where you didn’t have coverage.

Does my family’s income affect my MLS?

Yes, if you’re part of a family or couple and your combined family income exceeds the threshold ($202,000), you’ll be subject to MLS unless all members of your family are covered by appropriate private hospital insurance.

What is considered “income for MLS purposes”?

Income for MLS purposes includes taxable income plus reportable fringe benefits and superannuation contributions. This total determines whether you’re liable for the surcharge and at what rate.

Can I get an exemption from paying MLS?

You can avoid paying MLS entirely if you maintain appropriate private hospital cover throughout the financial year. There are no exemptions based on age or other factors unless you’re exempt from paying Medicare itself due to specific circumstances like low income.