The Medicare Levy Surcharge: why the higher thresholds may still catch you

The Medicare Levy Surcharge is one of the more avoidable taxes in the Australian system, and one of the most frequently paid unnecessarily. It applies to individuals and families with income above defined thresholds who do not hold an appropriate level of private hospital cover. For many of those who pay it, the cost of the appropriate hospital cover would have been less than the surcharge itself — making the surcharge a tax paid for no benefit. With the thresholds having changed on 1 July 2025, it is worth understanding precisely how the surcharge now operates.

What the surcharge is

The Medicare Levy Surcharge sits on top of the standard 2% Medicare Levy that most taxpayers pay. It is an additional charge of between 1% and 1.5% of income, levied on higher-income earners who do not hold private patient hospital cover. Its purpose is to encourage those who can afford private cover to take it up, reducing demand on the public hospital system.

The surcharge is calculated on a daily basis. A taxpayer who held appropriate hospital cover for part of the year and was uninsured for the remainder pays the surcharge only for the days they were uninsured.

The thresholds for 2025–26

The thresholds rose on 1 July 2025. For singles, the surcharge now applies in tiers above $101,000:

• Income of $101,001 to $118,000: surcharge of 1.0%

• Income of $118,001 to $158,000: surcharge of 1.25%

• Income above $158,000: surcharge of 1.5%

For families, the base threshold is $202,000, increasing by $1,500 for each dependent child after the first. The same tiered rate structure applies above that base.

The increase in the thresholds — the single threshold rose from $93,000 to $101,000 — sounds like relief. For many taxpayers, it is not. Incomes have risen over the same period, through wage growth and the flow-through of tax changes. A taxpayer whose income rose in step with or faster than the threshold may find themselves no better off, or even newly captured. The threshold moved, yet so did their income.

The income definition is broader than you expect

This is the element that catches the most people. The income used to test liability for the Medicare Levy Surcharge is not simply taxable income. It is a broader figure that adds back several items:

• Reportable fringe benefits, such as a novated lease or employer-provided car

• Total net investment losses, including negatively geared rental property losses and financial investment losses

• Reportable superannuation contributions, including salary sacrifice and personal deductible contributions

The consequence is that a taxpayer whose taxable income sits comfortably below $101,000 can still exceed the threshold once these add-backs are included. A negatively geared property investor, in particular, may have a taxable income well below the threshold yet an MLS income above it, because the rental loss that reduces taxable income is added back for surcharge purposes. This is one of the most common ways the surcharge is incurred unexpectedly.

The break-even calculation

For taxpayers near or above the threshold without hospital cover, the relevant calculation is straightforward. Compare the annual surcharge that would apply against the cost of an appropriate basic private hospital policy. In many cases — particularly for single taxpayers in the lower surcharge tiers — the hospital policy costs less than the surcharge. The policy is then economically rational on tax grounds alone, before any value is placed on the hospital cover itself.

There is a related consideration for those approaching the threshold. A taxpayer whose MLS income sits just above a tier boundary at year end may be able to bring it back below the line through a deductible superannuation contribution or other legitimate means — eliminating the surcharge entirely. This is a planning step worth taking before 30 June, not discovering after it.

Lifetime Health Cover loading

A separate yet related matter is worth noting for younger clients. An individual who does not hold private hospital cover by 1 July following their 31st birthday becomes subject to Lifetime Health Cover loading — an additional 2% on hospital premiums for each year they remain without cover after that date, up to a maximum of 70%. This loading is removed only after ten continuous years of holding cover. The practical implication is that delaying private hospital cover beyond age 31 makes it permanently more expensive to obtain later.

In practice

The Medicare Levy Surcharge rewards attention and punishes inattention. The thresholds, the broader income definition, and the break-even point against the cost of cover are all worth reviewing before year-end. For many taxpayers, a modest hospital policy costs less than the surcharge it avoids.

If you would like to review your position before 30 June, we welcome the conversation.

Corinne Kirk
Partner, Accountant

1300 102 542 | 0405 106 401
corinne@egu.au

Sources

• Australian Taxation Office — Medicare levy surcharge income, thresholds and rates: https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/medicare-levy-surcharge/medicare-levy-surcharge-income-thresholds-and-rates

• Australian Taxation Office — Medicare levy surcharge: https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/medicare-levy-surcharge

• Private Health Insurance Ombudsman — Lifetime Health Cover: https://www.privatehealth.gov.au/health_insurance/surcharges_incentives/lifetime_health_cover.htm

• Australian Taxation Office — Lifetime Health Cover: https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/private-health-insurance-rebate

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.