If your income is creeping above $101,000 and you do not hold private hospital cover, the Medicare Levy Surcharge (MLS) can quietly add 1.0% to 1.5% on top of your tax bill. The thresholds rose on 1 July 2025, so even taxpayers who were comfortably under the line last year may now be exposed. This guide walks through every tier, the broader "income for MLS purposes" rules, and the break-even point where basic hospital cover becomes cheaper than the surcharge.
What is the Medicare Levy Surcharge?
The Medicare Levy is a flat 2% of your taxable income that funds Australia's public health system. It applies to most residents earning above roughly $28,011.
The Medicare Levy Surcharge is something different. It is an *additional* tax of 1.0% to 1.5% charged on higher-income earners who do not maintain an appropriate level of private hospital cover for the full financial year. The policy goal is to push higher earners into private hospitals, easing pressure on the public system.
Key points to anchor:
- MLS is on top of the regular 2% Medicare Levy, not instead of it.
- Only hospital cover counts. Extras-only cover (dental, optical, physio) does not exempt you from MLS.
- The cover must be held for the full income year. Partial years are pro-rated.
FY2025-26 thresholds at a glance
The ATO (ATO guidelines) raised the thresholds effective 1 July 2025. Here are the current numbers for the financial year ending 30 June 2026.
| Tier | Singles income | Family income | MLS rate |
|---|---|---|---|
| 0 (no surcharge) | ≤ $101,000 | ≤ $202,000 | 0% |
| 1 | $101,001 – $118,000 | $202,001 – $236,000 | 1.0% |
| 2 | $118,001 – $158,000 | $236,001 – $316,000 | 1.25% |
| 3 | $158,001+ | $316,001+ | 1.5% |
Family thresholds increase by $1,500 per dependent child after the first. So a couple with three children has their Tier 0 ceiling lifted to $202,000 + ($1,500 × 2) = $205,000.
AusTax AI tip: If you are within $5,000 of the next tier ceiling at year end, additional super contributions or charitable donations can pull your assessable income back below the line and save the surcharge entirely.
"Income for MLS purposes" is broader than taxable income
This is the trap that catches the most people. The ATO does not use plain taxable income to test MLS. It uses a wider figure that includes:
- Taxable income (after deductions)
- Reportable fringe benefits (e.g. salary-packaged car, school fees)
- Reportable employer super contributions (salary-sacrificed super above SG)
- Net investment loss (negatively geared property or shares — added back, not subtracted)
- Exempt foreign employment income
A classic example: a teacher earning a $90,000 salary, salary-packaging a $15,000 car benefit and contributing $10,000 extra to super looks like a $90,000 earner on paper. For MLS, their income is $115,000 — well into Tier 2.
Worked example: when does hospital cover beat the surcharge?
Let us model a single taxpayer earning $120,000 (Tier 2, 1.25% MLS) with no private cover.
- MLS payable: $120,000 × 1.25% = $1,500/year
- Cheapest compliant basic hospital cover (with required excess): roughly $1,100 – $1,300/year
- After PHI Rebate at Tier 2 (~8.2% for under 65s): net cost ~$1,000 – $1,200
For most singles earning above $101,000, basic hospital cover costs less than paying the surcharge — and you get something tangible (lower public-hospital wait times, choice of doctor) for the money. Below the threshold the maths reverses: hospital cover is purely an out-of-pocket expense.
AusTax AI tip: If you take out cover mid-year to cap MLS exposure, you only avoid the surcharge for the days you were covered. The rest of the year is still surcharged on a daily pro-rata basis.
Family thresholds and the dependent child adjustment
"Family" for MLS means you, your spouse (married or de facto) and any dependent children. The combined family income is tested against the family threshold, regardless of who earned what.
Dependent child uplift: +$1,500 per child after the first. So a family with 4 dependents adds $4,500 to every threshold (since the first child is already baked into the family number).
If one spouse holds hospital cover but the other does not, the uncovered spouse can still be liable unless cover extends to the whole family. Make sure the policy lists every adult who needs to be covered.
Mid-year cover changes
MLS is calculated day by day. If you held cover for 200 days of the 365-day year, you are surcharged on the remaining 165 days only.
The ATO uses the "Number of days you do NOT have appropriate hospital cover" field on your tax return. Your insurer issues a tax statement each July showing the exact dates of cover.
Common scenarios:
- New cover taken out part-way through year — surcharge applies pro-rata to uncovered days.
- Cover lapsed for non-payment — the lapse window counts as uncovered time.
- Switched insurers with no gap — counts as continuous cover, no surcharge issue.
- Overseas Visitor Cover (OVC) for temporary residents — generally counts as appropriate cover for MLS.
Who is exempt from MLS?
Even without private hospital cover, you avoid MLS if you fall into one of these categories:
- DVA Gold Card holders (entitled to free public and most private hospital treatment)
- Recipients of certain pensions, including the blind pension and some disability support pensions
- Members of religious orders with vows of poverty
- Foreign residents for tax purposes (different rules apply)
- Norfolk Island residents in certain cases
If you are exempt, claim the exemption at item M2 of your individual tax return.
Common mistakes to avoid
Summary checklist
- Calculate your "income for MLS purposes", not just taxable income.
- Compare it to the FY2025-26 thresholds: $101k / $118k / $158k (singles) or $202k / $236k / $316k (families).
- If above Tier 0, decide between paying the surcharge or buying compliant hospital cover (not extras-only).
- Check the break-even: above ~$101k single, hospital cover is usually cheaper than MLS.
- If you held cover only part of the year, expect a pro-rata calculation.
- Confirm any exemptions (DVA Gold Card, blind pension, etc.) at item M2.
*This article provides general information only and does not constitute financial or tax advice. For personalised advice, consult a registered tax agent.*
Need Help Navigating MLS?
Medicare Levy Surcharge and private health insurance decisions can be complex — especially when income crosses multiple tiers. a registered tax agent (see the directory)
*Disclaimer: This is general information only and does not constitute personal tax advice. MLS thresholds and private health insurance rules are subject to change. Consult a registered tax agent for advice tailored to your specific situation. Always verify against the latest ATO guidelines at ato.gov.au.*