Understanding the Medicare Levy

Medicare (Australia’s public health system, for the uninitiated) is partially funded by taxpayers through an additional tax called the Medicare Levy. On top of that, some Australians may also have to pay the Medicare Levy Surcharge (MLS) if they earn over certain income thresholds and don’t hold the right level of private hospital cover.

What is the Medicare Levy?

The Medicare Levy is an extra tax charged in addition to your regular income tax. It’s collected the same way as PAYG income tax withholding - your employer withholds your estimated income tax, Medicare Levy, and any HECS‑HELP repayments throughout the year.

Your actual Medicare Levy amount is calculated by the ATO once you lodge your tax return.

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Most of us can’t avoid paying the Medicare Levy, but higher‑income earners may find it cheaper to take out private hospital insurance than to pay the additional Medicare Levy Surcharge.

How much is the Medicare Levy?

The Medicare Levy is 2% of your taxable income - so if your annual taxable income is $85,000, you might be charged a $1,700 Medicare Levy - but you could be eligible for an exception or reduction if you earn under set thresholds. 

In 2024-25, singles earning $27,222 or less are exempt from paying the Medicare Levy, and that threshold is boosted to $43,020 for those entitled to the seniors and pensioners tax offset.

Meanwhile, singles who earn between $27,222 and $34,027 ($43,020 and $53,775 for those entitled to the seniors and pensioners tax offset) then you may be eligible for a reduced Medicare Levy.

Those thresholds are higher for families submitting their tax return as a unit:

To find out how much Medicare Levy you may need to pay, check out the ATO’s Medicare Levy calculator.

Other Medicare Levy exemptions

Even if you earn more than the above thresholds, you may be exempt from paying the Medicare Levy if you:

• Meet certain medical requirements
  Pensioners who are blind, entitled to free medical treatment for all conditions under Defence Force arrangements or Veterans' Affairs Repatriation Health Card, or receive a sickness allowance from Centrelink are entitled to full and half exemptions.

• Are a foreign resident
  You can claim a full exemption from the Levy if you were a foreign resident for the whole year. If you were a foreign resident for part of the year, you can still claim an exemption if you didn’t have dependents for that period, or if all your dependents were in a Medicare Levy exemption category while you were a foreign resident.

• Are not entitled to Medicare benefits
  If you have a Medicare Entitlement Statement from the Department of Human Services and did not have any dependents during that period (or they were also exempt) you won’t have to pay the levy. You may also qualify for a full exemption if you were a member of a diplomatic mission or consular post in Australia, were not an Australian citizen, or don’t normally live in Australia.

What is the Medicare Levy Surcharge?

Despite the similar-sounding name, the Medicare Levy Surcharge is an entirely different taxation mechanism to the Medicare Levy. It's payable if your income is over a certain amount and you don't have what the ATO deems "an appropriate level of private patient hospital cover".

The thresholds for the Medicare Levy Surcharge in financial year 2024-25 are $97,000 for singles and a combined $194,00, plus $1,500 for the second and every subsequent child, for families.

The purpose of the surcharge is to encourage higher-income earners to take out private health insurance and relieve the pressure on the public Medicare system. If you earn over the thresholds and want to avoid paying the surcharge, you probably need to have the right level of private patient hospital cover from an Australian health fund.

How much is the Medicare Levy Surcharge?

The Medicare Levy Surcharge (MLS) is calculated by a tier system, at a rate between 0% and 1.5% of your income, and families and spouses are assessed as a group.

Additionally, the income considered for the MLS may be slightly different to a person's overall income tax, as it includes things like distributions from family trusts, fringe benefits, and exempt foreign employment income.

After you've got that figure, here's the thresholds you can hold it up against for financial year 2024-25:

For families with two or more dependent children, the family income threshold is increased by $1,500 for each dependent child after the first child.

Medicare Levy Surcharge vs private health insurance

If you, your spouse, or any of your dependents are covered by private health insurance, you won’t have to pay the MLS and may be eligible for the private health insurance rebate (depending on your income). This rebate is an amount the government contributes towards the cost of your private health insurance premiums. However, you’ll only be exempt from paying the MLS if you have the appropriate level of private hospital cover.

Private health insurance with hospital cover can be expensive. However, you may end up better off by taking out hospital cover and avoiding the tax.

Additionally, if you take out private health insurance after the age of 31, you will pay a 2% loading on the premium for every year over 30 you went without private hospital cover as part of the Government’s Lifetime Health Cover (LHC) initiative. The initiative is designed to encourage Australians to take out private health insurance, thereby relieving pressure on the public system.

Read on for more ways to save money on your health insurance.