Two separate charges
Many Australians lump "Medicare costs" together, but the Medicare Levy and the Medicare Levy Surcharge are two different charges with different rules, different triggers, and different amounts. Understanding the distinction matters for accurately estimating your total tax position.
The Medicare Levy
The Medicare Levy is a 2% charge on your taxable income. It is collected alongside income tax and funds Australia's public healthcare system.
You do not opt in or opt out. The levy is calculated automatically as part of your income tax assessment. Your employer withholds it through PAYG, and the final amount is settled when you lodge your tax return.
On a $75,000 income the levy is $1,500. On $120,000 it is $2,400.
Who is exempt or pays a reduced levy
Low-income earners are either exempt from the levy or pay a reduced amount:
- Incomes below roughly $26,000: no levy applies
- Incomes between roughly $26,000 and $32,500: levy phases in at 10% of the income above the lower threshold
- Above $32,500: the full 2% applies to all taxable income
Foreign residents do not pay the Medicare Levy. Certain visa holders who are not entitled to Medicare benefits may also be exempt, subject to the ATO's rules.
The Medicare Levy Surcharge
The Medicare Levy Surcharge (MLS) is an entirely separate charge. It applies only to higher-income earners who do not hold an appropriate level of private hospital cover. Its purpose is to encourage higher earners to use private hospitals and ease pressure on the public system.
Unlike the base levy, the MLS is avoidable by holding a qualifying private hospital cover policy. Unlike the levy, it does not phase in: there is a cliff at the income threshold. Once you cross it, the surcharge applies to your full taxable income.
- $93,001 to $108,000: 1.0% of taxable income
- $108,001 to $144,000: 1.25% of taxable income
- $144,001 and above: 1.5% of taxable income
For families, the combined income threshold is $186,000 in FY2025–26, rising by $1,500 for each dependent child after the first.
The cliff effect near the threshold
The cliff structure creates an unusual outcome around the lower threshold. A person earning $93,001 without private cover owes 1% on their full income (roughly $930), triggered by a single dollar of extra earnings. At $93,000, the surcharge is zero.
For someone in this range, comparing the cost of a basic hospital cover policy to 1% of their income can be worth doing. A qualifying policy that removes the surcharge may cost less than the surcharge itself.
Private hospital cover and the MLS
Holding an appropriate private hospital cover policy removes the MLS entirely, regardless of income. The policy needs to meet the ATO's minimum standard: a complying hospital cover product with an excess no higher than $750 for singles or $1,500 for families.
Extras-only cover (dental, physiotherapy, optical) does not satisfy the requirement. Only hospital cover counts.
For people near the lower MLS tier, basic hospital cover is often cheaper than 1% of taxable income. For those well into the 1.25% or 1.5% tiers, the comparison depends on the premium cost for the level of cover desired.
Common misconceptions
"The Medicare Levy and the Surcharge are the same thing"
They are not. The 2% levy is paid by almost all working Australians automatically. The surcharge is an additional charge that only applies to higher earners without private hospital cover. You can pay the levy and never pay the surcharge, and paying the surcharge does not exempt you from the levy.
"Private health insurance removes the Medicare Levy"
Private health insurance removes the Surcharge for eligible earners above the threshold. The 2% base Medicare Levy still applies regardless of whether you hold private cover.
"I only pay the levy if I use public healthcare"
The levy is a tax applied to income. It is not a usage charge. You pay it whether or not you visit a GP, use a public hospital, or claim a Medicare rebate in a given year.
Frequently asked questions
Does salary sacrifice affect my MLS exposure?
Yes. Salary sacrifice into super reduces your taxable income. If it brings your income below the MLS threshold, the surcharge no longer applies. This is an indirect benefit of salary sacrifice for higher earners near the threshold.
Does the MLS come out of my pay automatically?
Only if you tell your employer about your private cover status on your withholding declaration. If you do not, the ATO may apply the MLS at tax return time, which can produce a larger-than-expected tax bill. Keeping your withholding declaration current avoids surprises.
What if I hold hospital cover for only part of the year?
The MLS is assessed on a proportional basis. If you hold appropriate cover for six months and not the other six, the surcharge applies only to the period without cover. The ATO calculates this from information reported by your insurer.
Is the MLS based on my income or my household income?
For singles, it is based on individual taxable income. For couples and families, the family threshold ($186,000 in FY2025–26, plus $1,500 per additional dependent child) applies based on combined income. If the family threshold is exceeded and neither partner holds appropriate cover, both may be liable.
The Income Tax Calculator models both the Medicare Levy and Surcharge, with a toggle for private hospital cover. For a broader explanation of how income tax brackets and rates work, see How Australian Income Tax Works.