If you're a high-income earner in Australia without appropriate private health insurance, the Medicare Levy Surcharge (MLS) could be costing you thousands of dollars each year. Unlike the standard Medicare Levy (which almost everyone pays), the MLS is an additional tax designed to encourage higher earners to take out private hospital cover and reduce pressure on the public health system.
For the 2025-26 financial year, understanding how the MLS applies to your situation is critical for tax planning. This guide covers the current thresholds, how the surcharge is calculated, and practical strategies to minimise or eliminate it.
What is the Medicare Levy Surcharge?
The Medicare Levy Surcharge is an extra tax imposed on Australian taxpayers who earn above a certain income threshold and do not have an appropriate level of private hospital cover. It was introduced by the Howard government in 1997 as part of a broader policy to encourage private health insurance uptake.
The MLS is applied on top of the standard 2% Medicare Levy. Depending on your income and family situation, the surcharge rate ranges from 1% to 1.5% of your taxable income. Unlike the Medicare Levy, which funds the public healthcare system, the MLS functions as a financial incentive — get private insurance, or pay more tax.
It is important to understand that the MLS is not the same as the Medicare Levy. The standard levy is a flat 2% applied to most taxpayers' taxable income. The MLS is an additional, income-tested surcharge that only applies to singles earning above $93,000 or families earning above $186,000 (for FY 2025-26) who lack appropriate hospital cover.
2025-26 MLS Thresholds and Rates
The ATO indexes the MLS thresholds annually based on movements in the Consumer Price Index (CPI). For the 2025-26 financial year, the thresholds are as follows:
Singles:
- Income below $93,000: No surcharge
- $93,001 — $108,000: 1% surcharge
- $108,001 — $144,000: 1.25% surcharge
- $144,001+: 1.5% surcharge
Families:
- Combined income below $186,000: No surcharge
- $186,001 — $216,000: 1% surcharge
- $216,001 — $288,000: 1.25% surcharge
- $288,001+: 1.5% surcharge
For families with children, the family income threshold increases by $1,500 for each child after the first. This means a family with two children has a base threshold of $187,500 before the MLS applies.
Your income for MLS purposes is your taxable income plus any reportable fringe benefits and total net investment losses (including net rental property losses). This broader definition can push your MLS income significantly higher than your salary alone.
How the MLS Is Calculated
The MLS is calculated on your entire taxable income, not just the amount above the threshold. This makes it a steep tax once you cross into surcharge territory.
Example: Sarah is a single earner with a taxable income of $110,000 for FY 2025-26. Without private hospital cover:
- MLS rate: 1.25% (falls in the $108,001 — $144,000 bracket)
- MLS payable: $110,000 × 1.25% = $1,375
If Sarah had income of $155,000:
- MLS rate: 1.5%
- MLS payable: $155,000 × 1.5% = $2,325
Compare this to the cost of a basic hospital-only policy, which for a young professional might cost $1,000-$1,500 per year. In many cases, the insurance premium is comparable to or cheaper than the surcharge — and you get the benefit of health cover.
Strategies to Minimise or Eliminate the MLS
1. Take Out Appropriate Private Hospital Cover
The simplest strategy is to take out an eligible private hospital policy. To satisfy the MLS requirement, your policy must cover hospital treatment (not just extras like dental or physio). The policy must be held continuously — a gap of even a few days can trigger the surcharge for the full year.
2. Reduce Your Taxable Income
Since the MLS is calculated on your taxable income plus certain adjustments, reducing your income can lower or eliminate the surcharge:
- Salary sacrifice into super: Concessional contributions reduce your taxable income dollar-for-dollar
- Charitable donations: Tax-deductible gifts lower your income
- Investment property expenses: Net rental losses reduce your MLS income
However, you cannot reduce your income below the threshold purely through negative gearing, because net investment losses are added back for MLS purposes.
3. Income Splitting for Families
For couples, optimising which spouse holds investments or earns additional income can keep your combined MLS income below the family threshold. Strategies include:
- Holding income-producing assets in the lower-earning spouse's name
- Ensuring both spouses have appropriate cover rather than just one
4. Lifetime Health Cover Loading
If you delay taking out hospital cover past age 31, you may incur a Lifetime Health Cover (LHC) loading of 2% per year of age over 30. This loading can make insurance more expensive if you wait too long. The loading caps at 70% after 10 years of delay and disappears after 10 continuous years of cover.
Conclusion
The Medicare Levy Surcharge is a significant tax consideration for any Australian earning above $93,000 as a single or $186,000 as a family. In most cases, the cost of an appropriate private hospital policy is comparable to or less than the surcharge itself, making it financially sensible to maintain cover.
Before making a decision, run the numbers for your specific situation. The optimal choice depends on your income level, family structure, age, and health insurance needs.
Check your potential MLS liability with the BizMetrixs Medicare Levy Surcharge Calculator to see exactly how much you could save with the right health insurance strategy.