Many Australians receiving their tax notice of assessment notice two separate amounts: the Medicare levy and the Medicare levy surcharge (MLS). Understanding the difference can help you manage your tax and determine whether private health insurance can reduce your liability.
1. Medicare Levy: The Basics
The Medicare levy is a compulsory charge that helps fund Australia’s public healthcare system. Key points:
- Generally 2% of your taxable income
- Usually withheld by your employer throughout the year
- Private health insurance does not exempt you from paying the Medicare levy
- Some may qualify for reduction or exemption, e.g., low-income earners, foreign residents, or medical exemptions
2. Medicare Levy Surcharge (MLS): Encouraging Private Health Insurance
The Medicare levy surcharge (MLS) is an additional tax for higher-income earners who do not have appropriate private hospital cover. Its purpose is to encourage people to take out private insurance, easing pressure on the public system.
- Calculated when you lodge your tax return, not automatically withheld
- Applies if your income exceeds the MLS threshold and you, your spouse, and dependants don’t have appropriate private hospital cover
- Rates vary depending on income tier
3. Income for MLS Purposes
Your MLS income includes:
- Taxable income
- Reportable fringe benefits
- Total net investment losses
- Reportable super contributions
- Spouse income (if applicable)
2025–2026 MLS thresholds and rates:
Singles:
- Base tier ≤ $101,000 → 0% MLS
- $101,001–$118,000 → 1% MLS
- $118,001–$158,000 → 1.25% MLS
- ≥ $158,001 → 1.5% MLS
Families:
- Base tier ≤ $202,000 → 0% MLS
- $202,001–$236,000 → 1% MLS
- $236,001–$316,000 → 1.25% MLS
- ≥ $316,001 → 1.5% MLS
Family threshold increases by $1,500 for each dependent child after the first.
4. Private Health Insurance Requirements
To avoid the MLS, you need an appropriate level of private patient hospital cover:
- Singles: policy with excess ≤ $750
- Couples/families: policy with excess ≤ $1,500
- Must cover all members for the full income year
- Extras-only policies (dental, optical) and travel insurance do not qualify
5. Practical Next Steps
- Review your income – Use the ATO income tests calculator to check if MLS applies.
- Evaluate your insurance – If income exceeds MLS threshold, consider private hospital cover to save money.
- Understand your policy – Confirm excess and coverage meet MLS requirements.
- Consult a professional – Tax advisers or financial planners can provide tailored advice.
- Stay informed – MLS thresholds and tax rules may change annually.
Plan Ahead to Minimise MLS Liability
Knowing the difference between the Medicare levy and Medicare levy surcharge allows you to manage your tax effectively. With the right private health insurance and careful planning, you can reduce your MLS liability and stay compliant with ATO requirements.