Medicare Levy Low-Income Threshold 2026 — ATO Guide

If you earn under about $35,000 and you've been quietly paying the 2% Medicare Levy on your tax return, there is a strong chance you've been paying too much — and the FY2025-26 threshold indexation that took effect on 1 July 2025 just made that even more likely.

This guide explains what the Medicare Levy low-income threshold actually does, how the new 2025-26 amounts work, the senior and family variants, and the single most confused point in Australian personal tax: the Medicare Levy is not the Medicare Levy Surcharge. They sound identical. They are not. We'll untangle both, then walk through worked examples for a retiree on $30k, $48k and $60k so you can see exactly where each dollar of levy starts.

What the Medicare Levy actually is

The Medicare Levy is a flat 2% charge on your taxable income that helps fund Australia's universal public healthcare system. Unlike the marginal income-tax brackets, it does not phase up by tier — once you're over the threshold, the full 2% applies to your entire taxable income (subject to the reduction zone we'll cover below).

Most employees see it bundled into PAYG withholding so the tax office can balance it out at year-end. It appears on your Notice of Assessment as a separate line item below "Tax on Taxable Income".

A few categories are exempt outright:

• Foreign residents for the entire income year
• Australians who don't qualify for Medicare (most temporary visa holders, including students on certain subclasses)
• Holders of a Medicare Entitlement Statement showing they were not entitled to Medicare benefits
• Norfolk Island residents (specific cases)
• Blind pensioners, certain Department of Veterans' Affairs gold-card holders, and some other specific categories

If you qualify for a full or partial exemption based on residency or visa, that's a separate concept from the low-income threshold — and it's claimed on a different part of your return.

The 2025-26 thresholds: what changed on 1 July 2025

The Medicare Levy low-income thresholds are indexed each year in line with CPI. For 2025-26, the single "all other taxpayers" lower threshold rose from $27,222 to $28,011 (about 2.9%), and the upper threshold rose from $34,027 to $35,013. The ATO has published the following gazetted figures:

Here are the confirmed 2025-26 figures (ATO, ato.gov.au):

*Thresholds are the ATO's published 2025-26 figures (ATO guidelines). Check ato.gov.au before lodging for the precise gazetted numbers for your circumstances.*

Note the senior thresholds are considerably higher. That reflects the design intent: pensioners and SAPTO-eligible seniors should generally not pay Medicare Levy on age-pension-style incomes.

How the reduction zone ("the 10c shade-in") works

This is where most calculators get it wrong and where understanding the rule saves real money.

Between the full-exemption point and the full-levy point, the levy phases in at 10 cents per dollar of income above the lower threshold — not 2%. The phase-in is designed so the moment your levy equals 2% of taxable income, you've reached the upper threshold and the shade-in stops.

Mathematically:

• If taxable income ≤ lower threshold → levy = $0
• If lower threshold < taxable income < upper threshold → levy = 10% × (taxable income − lower threshold)
• If taxable income ≥ upper threshold → levy = 2% × taxable income (the full standard rate)

The upper threshold is set at lower / 0.8 (because 0.10 × upper = 0.02 × upper × (1 / 0.8) at the cross-over point). That's why the singles reduction zone spans roughly $7,002 — exactly 25% of the lower threshold.

Worked example: a retiree at three different incomes

Let's take Margaret, a 67-year-old self-funded retiree (no longer working but drawing super pension and a small annuity). She's a single Australian resident, qualifies for SAPTO and the senior threshold, and has no private hospital cover.

Scenario A: $30,000 taxable income

• $30,000 < $44,268 (senior single full-exemption threshold)
• Medicare Levy = $0
• Margaret is in the full-exemption zone. The 2% line doesn't appear on her return at all.

Scenario B: $48,000 taxable income

• $48,000 is between $44,268 and $55,335 → reduction zone
• Levy = 10% × ($48,000 − $44,268) = 10% × $3,732 = $373.20
• If she'd been outside the reduction zone, the standard calculation would be 2% × $48,000 = $960. So the low-income shade-in saves her $586.80.

Scenario C: $55,000 taxable income

• $60,000 > $55,335 → above the upper senior threshold
• Levy = 2% × $60,000 = $1,200
• Margaret is now on the full standard rate. The shade-in no longer applies. Each additional dollar of taxable income adds 2 cents of Medicare Levy on top of her marginal income-tax rate.

If Margaret were a non-senior single instead, the equivalent scenarios would use the lower thresholds ($28,011 / $35,013):

This is why the senior threshold matters so much: a retiree on $33,000 pays zero Medicare Levy, while a working Australian on the same income pays close to $499.

Families and dependent children

The family threshold is what applies when you have a spouse for the full year, or you maintain at least one dependent child or student for the whole year. The threshold is higher because it's tested against your combined family taxable income.

For each dependent child or student, the family threshold lifts by $4,338 (lower) and $5,423 (upper). So a family of four (two parents, two kids) would have a family threshold of roughly:

$47,238 + $4,338 + $4,338 = $55,914 lower threshold

$59,047 + $5,423 + $5,423 = $69,893 upper threshold

The family test is done as a group: if combined family taxable income is below the family lower threshold, neither spouse pays Medicare Levy. If it's in the reduction zone, the levy is calculated on the family income shortfall and apportioned between spouses based on their share of taxable income.

If you're a single parent, you still use the family threshold (with the child uplift) — you don't need a spouse for the family rules to apply. That's a common point that gets missed.

How LITO interacts (or rather, doesn't)

The Low Income Tax Offset (LITO) and the Medicare Levy low-income threshold are easy to confuse because they both target the same low-to-middle-income earners. They're independent mechanisms doing different jobs:

• LITO reduces your income tax (the marginal-bracket calculation). It tops out at $700 for taxable income up to $37,500, then phases out completely by $66,667.
• Medicare Levy low-income threshold determines whether the 2% Medicare Levy applies at all. It's a binary-then-tapered test, not a continuous offset.

A single non-senior earner on $33,000 gets the full $700 LITO and pays a partial Medicare Levy of $499 — these calculations don't talk to each other. LITO cannot reduce the Medicare Levy; it only reduces income tax. If income tax is already $0 before LITO, the unused LITO is simply lost.

This matters when you're modelling your refund: people sometimes assume LITO "covers" the levy. It doesn't. Your refund estimator needs to compute both separately.

The single biggest confusion: Medicare Levy vs Medicare Levy Surcharge

These are completely different taxes. The Australian Tax Office has tried for two decades to make people stop conflating them, and it's still the #1 source of confused emails to tax agents at lodgement time.

The Medicare Levy *Surcharge* only kicks in on top of the standard 2% Medicare Levy, and only if you (a) earn over the surcharge threshold and (b) don't have an appropriate private hospital cover for the full year.

If you take out a basic private hospital policy from 1 July, your MLS for that year is zero — but your standard 2% Medicare Levy still applies (assuming you're above the low-income threshold). The two are stackable, not interchangeable.

We cover MLS in depth in our Medicare Levy Surcharge calculator, including the tiered thresholds and what counts as appropriate hospital cover.

What it means for PAYG withholding

Your employer withholds Medicare Levy as part of your PAYG tax. The default ATO PAYG withholding schedules assume you don't qualify for the low-income threshold reduction, so if you spend any year close to the threshold, you'll typically be over-withheld during the year and receive the difference back at tax time.

Three practical implications:

Reduction zone calculation: a worked spreadsheet check

If you want to verify the math yourself, here's the formula in algebraic form:

Lower threshold (L) = the gazetted figure for your category

Upper threshold (U) = L / 0.8

Phase-in rate (P) = 0.10 (i.e., 10 cents per $1 over L)

For taxable income (T):

• If T ≤ L: Levy = $0
• If L < T < U: Levy = P × (T − L) = 0.10 × (T − L)
• If T ≥ U: Levy = 0.02 × T

Cross-check at the upper threshold: at T = U, P × (U − L) = 0.10 × (U − L) = 0.10 × (L/0.8 − L) = 0.10 × L × (1/0.8 − 1) = 0.10 × L × 0.25 = 0.025 × L. And at the same point, 0.02 × T = 0.02 × U = 0.02 × L / 0.8 = 0.025 × L. The two formulas meet exactly at U, which is how the legislation guarantees no step at the threshold.

This is the kind of detail our tax refund calculator gets right automatically — but if you're hand-checking a tax agent's work, the formulas above will let you verify within $1.

When to act on this

For anyone lodging an FY2025-26 return (from 1 July 2026 onwards), the new thresholds apply automatically — both the ATO online return and pre-fill data will use the indexed figures. You don't need to claim or elect anything special; you just need to make sure your taxable income figure is correct and your dependent/family details are filled in.

If you've already lodged your 2025-26 return using outdated levy figures from a guide written before the indexation announcement, the ATO's processing system will apply the correct thresholds during assessment, so you don't generally need to amend. But if you self-prepared and used software that wasn't updated for the 2025-26 indexation, your draft refund estimate may have been understated by a small amount.

For 2026-27 onwards, the thresholds will be indexed again — likely by another smaller increment closer to standard CPI growth. The principle stays the same: a full-exemption zone at the bottom, a 10c per $1 shade-in zone in the middle, and the full 2% above.

Related reading

• Medicare Levy Surcharge calculator — the other Medicare-related tax, for higher earners without private hospital cover
• Tax refund calculator (FY2025-26) — model your full return including levy, surcharge, LITO and HECS
• Federal Budget 2026 personal tax changes — overview of every measure including the threshold indexation
• HECS repayment thresholds 2025-26 — the other big change to low-to-middle earner tax in 2025-26

Bottom line

The 2025-26 indexation lifts the Medicare Levy free-zone to $28,011 for singles (up from $27,222), with similar increases for families and seniors. If your taxable income is anywhere between about $28,000 and $35,000 (or $44,000–$55,000 if you're a senior single), it's worth taking 30 seconds to check which side of the threshold you're on — the difference between a $0 levy and a $499 levy is real money for someone on a tight budget.

And whatever you do, don't confuse it with the Medicare Levy *Surcharge*. The surcharge is what hits high earners without private hospital cover. The Levy is the universal 2% that almost everyone pays. They share a name and almost nothing else.

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