Medicare Levy Surcharge: When Private Cover Saves You Money

TL;DR

The Medicare Levy Surcharge (MLS) is an extra 1.0% to 1.5% of your income for surcharge purposes that the ATO charges Australian residents who do not hold an appropriate level of private hospital cover and who earn above the singles or family threshold. For FY2025-26 the singles threshold is $97,000 and the family threshold is $194,000, with the family threshold rising by $1,500 for each dependent child after the first.

The surcharge stacks on top of the ordinary 2% Medicare Levy. Crucially it is calculated on a broader income base than your taxable income — the ATO calls this income for MLS purposes, and it adds back reportable fringe benefits, reportable employer super contributions, total net investment loss and exempt foreign income.

The decision to take private hospital cover is therefore part-tax, part-insurance. For someone landing in the bottom MLS tier (1.0%, $97,001–$113,000 single), the surcharge is roughly $970–$1,130 a year, which is in the same neighbourhood as a basic-tier hospital policy with a $750 excess. As your income climbs into the 1.25% and 1.5% tiers, the maths skews increasingly in favour of holding cover.

This guide walks through the FY2025-26 thresholds, the family-adjustment rules, the income definition the ATO actually uses, and three worked examples — graduate, dual-income family with two kids, and a dual-income high-income couple — that show where the break-even sits.

How the surcharge works

The MLS is designed to encourage Australians who can afford private health cover to take it up, easing demand on the public system. It is set out in the Medicare Levy Act 1986 and administered by the ATO. The surcharge is layered on top of the ordinary 2% Medicare Levy and is charged at three rates depending on income for MLS purposes:

MLS tier (FY2025-26)	Singles income	Family income	MLS rate
Base	$97,000 or less	$194,000 or less	0%
Tier 1	$97,001 – $113,000	$194,001 – $226,000	1.0%
Tier 2	$113,001 – $151,000	$226,001 – $302,000	1.25%
Tier 3	$151,001+	$302,001+	1.5%

The family thresholds rise by $1,500 for each dependent child after the first. So a couple with three children sits on a base threshold of $194,000 + ($1,500 × 2) = $197,000.

You only escape the surcharge if you and all of your dependants are covered by an appropriate level of private hospital cover for the whole income year. The ATO's definition of appropriate hospital cover requires the policy to have an excess of $750 or less for singles and $1,500 or less for couples and families. Extras-only ("ancillary") cover does not count — only hospital cover counts.

If you take cover part-way through the year, the surcharge is pro-rated for the days you were uninsured. The ATO's worked examples assume a full-year basis; the partial-year calculation is done on the income tax return.

What "income for MLS purposes" actually adds

This is where most readers' mental model breaks. Income for MLS purposes is not your taxable income — it is wider:

• Taxable income (line 15 on the income tax return)
• Reportable fringe benefits (grossed up at the lower rate for MLS purposes)
• Reportable employer super contributions (RESC) — including salary sacrifice
• Total net investment loss — both rental property and financial investment
• Exempt foreign employment income

For a salary sacrificer, this is a particularly important nuance. If you earn $90,000 of taxable income and salary-sacrifice $15,000 into super, your income for MLS purposes is $105,000, which lands in Tier 1 — even though your taxable income is below the $97,000 threshold. Salary sacrifice does not get you out of the MLS.

Similarly, an investor with a negatively geared rental loss of $20,000 has that loss added back. A taxable income of $85,000 with a $20,000 net rental loss gives an MLS income of $105,000 — Tier 1.

The ATO documents this in detail at the ATO under "Medicare levy surcharge income, thresholds and rates". The income test reflects the policy intent: people who restructure their income downwards through salary sacrifice or geared investment are not, in the government's eyes, low-income earners for surcharge purposes.

Official source

• Medicare Levy Act 1986 (Cth) — sets the legislated thresholds and surcharge rates.
• ATO — Medicare levy surcharge income, thresholds and rates — the authoritative reference for FY2025-26 thresholds and the family adjustment.
• ATO — Income for Medicare levy surcharge purposes — the inclusive definition.
• ASIC's MoneySmart — Private health insurance — independent guidance on policy comparison.
• Private Health Insurance Act 2007 (Cth) — defines the policy excess limits that determine "appropriate" cover.

If a third-party site quotes different threshold numbers, the ATO page is right. The thresholds were frozen between 2014 and 2023 and then unfrozen — the FY2023-24 to FY2025-26 figures move year on year with the legislated indexation.

Worked examples

The numbers below assume a full year of either holding or not holding hospital cover. All figures are FY2025-26 unless otherwise noted.

Example 1 — Graduate, single, $98,500 taxable income, no salary sacrifice

• Taxable income: $98,500
• Reportable employer super: $0
• Net investment loss: $0
• Reportable fringe benefits: $0
• Income for MLS purposes: $98,500 — Tier 1 (1.0%)

Without hospital cover the MLS = 1.0% × $98,500 = $985 per year.

The cheapest basic-tier hospital policy in NSW with a $750 excess sits at roughly $1,150 to $1,400 per year for a 30-year-old after the Australian Government Rebate. Premium varies by insurer and state but the floor is below the surcharge plus a small headroom.

Break-even check:

• MLS avoided: $985
• Cheapest basic hospital policy after rebate: ~$1,250
• Net cost of cover: about $265

For a single graduate just over the threshold, hospital cover at the cheapest tier costs you around $5 a week more than the surcharge. That extra cost buys you actual hospital cover plus avoidance of Lifetime Health Cover (LHC) loading if you stay insured continuously from age 31. The decision is closer than the headline tax saving suggests; it tilts in favour of cover only if you value the insurance itself.

A nudge: if the graduate starts salary-sacrificing $5,000 into super to drop taxable income to $93,500, the MLS income for purposes is still $98,500 because the RESC is added back. The surcharge is unchanged.

Example 2 — Dual-income family with two children, combined $215,000

• Earner A taxable: $120,000
• Earner B taxable: $95,000
• Combined: $215,000
• Reportable super (A): $0
• Reportable super (B): $0
• Net investment loss: $0
• Family threshold: $194,000 + ($1,500 × 1) = $195,500
• Income for MLS purposes (combined): $215,000 — Tier 1 (1.0%)

Without hospital cover, MLS = 1.0% × $215,000 = $2,150 per year (the surcharge applies to both spouses' income, calculated on the combined figure but charged to each individual proportionally).

Family hospital cover with a $1,500 excess across two adults and two children costs roughly $2,800 to $3,400 per year in NSW after the Government Rebate, depending on insurer and tier.

Break-even check:

• MLS avoided: $2,150
• Family policy after rebate: ~$3,100
• Net cost of cover: about $950

For this family, the surcharge alone does not pay for the policy — they are roughly $950 a year worse off cash-wise if they buy cover purely to avoid the MLS. But the policy buys two adults and two kids real hospital cover, including ambulance and elective procedures with shorter wait times. For most families with children at this income level, the value of the insurance itself usually decides the question.

If the family's income climbed to $235,000 (Tier 2), the surcharge would jump to 1.25% × $235,000 = $2,938 per year, very close to the family policy cost. By Tier 3 the maths inverts and cover is cheaper than the surcharge.

Example 3 — Dual-income professional couple, no kids, combined $310,000

• Earner A taxable: $180,000, salary sacrifice $20,000
• Earner B taxable: $110,000, salary sacrifice $5,000
• Reportable employer super (A): $20,000
• Reportable employer super (B): $5,000
• Combined taxable: $290,000
• Combined RESC: $25,000
• Combined income for MLS purposes: $315,000 — Tier 3 (1.5%)

Without hospital cover, MLS = 1.5% × $315,000 = $4,725 per year.

Family hospital cover for two adults at a mid-tier policy with a $750 excess costs roughly $2,400 to $3,000 per year after the Government Rebate (the rebate tapers down at higher incomes — at Tier 3 the rebate is 0% for under-65s, so the gross premium is the figure that matters).

Break-even check:

• MLS avoided: $4,725
• Mid-tier couple's policy at full premium (no rebate at Tier 3): ~$3,200
• Net saving from holding cover: about $1,525 per year

At Tier 3, the maths is unambiguous. Two professionals on a combined $315,000 are out of pocket about $1,500 a year more if they go uninsured, before counting the value of the insurance itself. The Government Rebate phasing out at higher incomes is offset by the higher surcharge rate, so cover still wins.

There is a separate consideration for this couple: salary sacrifice into super is a Division 293 trigger. With combined income for surcharge purposes at $315,000 and the Division 293 threshold at $250,000 per individual, neither earner individually crosses Division 293 yet — but the older partner is heading there. See Division 293 tax for high earners for the next layer.

Common pitfalls

• Confusing the Medicare Levy with the MLS. The 2% Medicare Levy applies regardless of private hospital cover (with reductions for low income). The MLS is the additional 1.0%–1.5% that hospital cover lets you avoid. They are separate calculations on the income tax return.
• Treating extras-only cover as enough. Extras (dental, optical, physio) cover is not "appropriate" hospital cover for MLS purposes. Only a hospital policy with the right maximum excess avoids the surcharge.
• Forgetting the policy excess limit. A hospital policy with a $1,000 single / $2,000 family excess does not count. The maximum is $750 single / $1,500 family. If your existing cheap policy has a higher excess, it doesn't help with the MLS.
• Underestimating the family adjustment. Each dependent child after the first lifts the family threshold by $1,500. A couple with four kids has a base threshold of $194,000 + $4,500 = $198,500. Worth checking before assuming you are in a tier.
• Assuming salary sacrifice fixes the surcharge. Reportable employer super contributions are added back into income for MLS purposes. Sacrificing $20,000 into super does not reduce your MLS income. (It does reduce your ordinary taxable income — but that is a different threshold, the LITO and the marginal rate, not the MLS.)
• Forgetting net investment loss is added back. Negatively geared property losses and financial investment losses are added back. An investor with $90,000 taxable income and a $15,000 net rental loss has $105,000 of MLS income — Tier 1.
• Believing the rebate cancels the cost. The Australian Government Rebate on private health insurance reduces the premium by 8.954% to 31.339% depending on age and income for FY2025-26. At Tier 3 (the highest income tier) the rebate phases to zero for under-65s. Higher-income singles and families pay the full premium gross, but they are also where the surcharge bites hardest.
• Not accounting for the LHC loading. Lifetime Health Cover loading adds 2% per year to your premium for every year past age 30 you do not hold hospital cover, capped at 70%. This is separate from the MLS but worth pricing in if you are deciding between cover-now or cover-later.
• Treating the "income for MLS purposes" as a single number. For a couple, the family threshold is checked against the combined income, but the surcharge is then applied to each spouse's individual income. This catches couples where one earner is just under and one is just over.
• Believing the threshold gap means partial cover works. Holding hospital cover for 6 months out of 12 does not put you in a halfway zone — the surcharge is pro-rated on the days you were uninsured. The break-even calculation is most sensitive when you take up cover late in the year, because you only avoid roughly half the surcharge for half the policy cost.

How the Lifetime Health Cover (LHC) loading interacts

Lifetime Health Cover is the second policy lever that pushes Australians into private hospital cover. It is a 2% loading per year added to your hospital premium for every year you delay taking cover past 1 July following your 31st birthday, up to a cap of 70%. The loading is removed after 10 continuous years of cover.

For someone deciding at 35 whether to take cover, the LHC implication is small (an 8% loading if you join at 35 instead of 31). At 45 it is a 28% loading — a substantially more expensive policy for life until you accumulate 10 continuous years of cover. The break-even calculation should account for this, because what looks like a year-by-year wash now becomes a permanent uplift to the future cost of cover.

A practical decision tree for a 32-year-old just over the singles threshold:

1. If you plan to ever hold private hospital cover — buy now to lock in the no-loading rate.
2. If you are confident you will permanently emigrate or never want private cover — the MLS is the only annual cost; the LHC is irrelevant.
3. In between — calculate the lifetime cost of LHC loading you would face if you waited 10 years, and add it to the year-by-year break-even number.

A note on the Australian Government Rebate

The Australian Government Rebate on private health insurance is means-tested. For FY2025-26 the rebate percentages for under-65s are:

• Base tier (income up to MLS threshold): 24.608%
• Tier 1: 16.405%
• Tier 2: 8.202%
• Tier 3: 0%

This is what makes higher-income households' break-even less attractive in absolute dollars: at Tier 3 you pay the full premium and the rebate is zero. But because the surcharge rate also climbs to 1.5% on a larger base, the comparison still tilts towards holding cover for most professional couples.

For people aged 65+ the rebate percentages are higher; for 70+ higher again. The thresholds and rebate percentages are reviewed annually and published by the ATO on the Private health insurance rebate page.

State-by-state policy pricing notes

Hospital policy pricing varies by state because the underlying claims experience differs. NSW and VIC tend to sit a touch above the national average; QLD and WA are closer to the median; SA and TAS are usually the cheapest. The policy excess limits ($750 single / $1,500 family for "appropriate" cover under MLS rules) apply nationally and do not change by state.

A practical implication: if you are a higher-income earner who moves between NSW and SA you may find your basic-tier policy 10% to 15% cheaper after the move, even though your surcharge profile is identical. The break-even maths therefore shifts year on year if you change state.

Lifetime Health Cover loading and migration

If you held private hospital cover overseas before moving to Australia, the LHC clock starts on 1 July following your 31st birthday or the date you become an Australian resident, whichever is later. This is administered by Services Australia on behalf of the private health funds. Migrants arriving at 32 do not face an immediate 2% loading — they have a one-year grace period.

Permanent migrants who delay taking cover past their LHC date face the same 2%-per-year loading as locals. Temporary visa holders are not eligible for the Australian Government Rebate but may still need cover to satisfy visa conditions (e.g. 482 visas typically require evidence of overseas health cover).

When private cover does not save money

There are circumstances where the maths actually points the other way:

• Income just below the threshold. If your income is comfortably below $97,000 single / $194,000 family, the MLS is zero. Hospital cover bought purely to avoid the surcharge wastes money. Cover may still be worth buying for the insurance value, but not on the MLS argument.
• Tier 1, basic policy, no plans for elective surgery. A graduate at $98,000 buying a $1,400 policy to avoid a $980 surcharge loses $420 a year. If they will not actually use the hospital cover (no surgery, no maternity, no procedures the public system handles fine in their region) then the surcharge is the cheaper option. The LHC loading argument may flip the long-term maths back, depending on age.
• Couples with very different incomes. If Earner A is on $200,000 and Earner B is on $5,000, the family threshold check uses combined $205,000, which is over $194,000. But the surcharge is then charged on each spouse's individual income — Earner B's $5,000 surcharge is essentially zero, while Earner A pays 1.0% × $200,000 = $2,000. A couple's hospital policy at $3,000 may not pay back; a single's policy for Earner A only is not allowed under the rules — appropriate cover requires the spouse and dependants to be insured too.

What to watch for in the next Budget cycle

The Federal Budget night (the second Tuesday in May) is where MLS thresholds are typically refreshed. Two items that have been flagged in policy commentary for FY2026-27:

• Threshold indexation. From FY2023-24 onwards thresholds are indexed annually. Expect a $2,000–$4,000 nudge to both the singles and family thresholds at the next Budget.
• Surcharge rate review. The 1.0%/1.25%/1.5% rate structure has been stable for more than a decade. There is no current proposal to change it, but the design discussion is live in the Intergenerational Report context.

We update this article each May after the Federal Budget. The "Updated" date at the top of the page is the version you are looking at.

Related calculators

• Medicare Levy Surcharge Calculator — plug in your income and family configuration to see the exact surcharge for FY2025-26.
• Medicare Levy Reduction Calculator — for households at the lower end where the 2% Medicare Levy itself phases in.
• Division 293 Tax Calculator — the next layer for incomes above $250,000 with reportable super contributions.
• Salary Sacrifice Super Calculator — confirm whether sacrificing into super is worth it net of MLS effects.
• HECS-HELP Repayment Calculator — HRI uses a similar add-back basis for reportable super and net investment loss.

This article is general information based on the legislated FY2025-26 MLS thresholds and rates. It is not personal tax or insurance advice; speak to a registered tax agent for your specific situation, and a licensed health insurance adviser before choosing a policy. The figures will be revisited each May after the Federal Budget.