The Medicare Levy and Medicare Levy Surcharge: what Australian taxpayers need to know in 2026

The Medicare Levy is a 2% tax on the taxable income of most Australian residents, used to help fund the public health system. The Medicare Levy Surcharge (MLS) is a separate charge of 1% to 1.5% that applies to higher-income earners who do not hold an appropriate level of private hospital cover. The two are often confused, but they are assessed differently, triggered by different thresholds, and have different planning implications. This guide explains how both work for the 2025–26 income year, who is exempt or entitled to a reduction, and where the common mistakes sit.

How the Medicare Levy works

The standard Medicare Levy is 2% of taxable income for Australian residents for tax purposes. It is calculated by the ATO when you lodge your return, applied to the same taxable income figure used for income tax, and collected alongside your income tax assessment. For employees, PAYG withholding usually covers it during the year. For sole traders, investors, and trustees, it forms part of the final tax payable on assessment.

Taxable income for this purpose is your assessable income (wages, business income, rental income, interest, dividends, distributions, capital gains) less allowable deductions. It is not your gross pay, your turnover, or your cash position. A strong business year, a property sale, a trust distribution, or interest on savings can all push taxable income higher than your regular salary suggests, and the levy follows.

Who has to pay it

If you are an Australian resident for tax purposes and your taxable income is above the relevant low-income threshold, the levy applies. There is no separate Queensland rate. Residency for Medicare purposes is distinct from tax residency, which matters for exemptions (covered below).

Low-income thresholds for 2025–26

Low-income thresholds are indexed each year and set the point at which the levy starts to apply. Below the lower threshold, you pay no levy. Between the lower and upper threshold, the levy shades in at 10 cents per dollar over the lower threshold, rather than jumping straight to 2%. Above the upper threshold, the full 2% applies.

For couples and families, the base thresholds increase by $4,216 (lower) and $5,270 (upper) for each dependent child. A couple with two dependent children, for example, would have a lower threshold of $54,339 and an upper threshold of $67,923 for 2025–26.

Exemptions from the Medicare Levy

Full or half exemptions are available in limited circumstances. The main categories are:

• You were not entitled to Medicare benefits for all or part of the year (for example, certain temporary visa holders not covered by a reciprocal health care agreement). You need a Medicare Entitlement Statement from Services Australia to support this.
• You were a blind pensioner or received a sickness allowance, and your dependants were also in an exemption category.
• You were a foreign resident for the whole year.
• You held a medical exemption certificate for prescribed conditions.

The test is entitlement, not use. Holding private health cover, or not visiting a doctor, does not make you exempt. If your entitlement status changed partway through the year, a half exemption may apply for the relevant days.

The Medicare Levy Surcharge: how it differs

The MLS is an additional charge on top of the standard levy. It is designed to push higher-income earners into the private hospital system and reduce pressure on Medicare. Two conditions must both be met for it to apply: your income for MLS purposes is above the threshold, and you (plus your spouse and dependants, if relevant) do not hold an appropriate level of private patient hospital cover for the full year.

2025–26 surcharge thresholds and rates

The family threshold increases by $1,500 for each dependent child after the first. A family with three children, for example, has a base threshold of $205,000 rather than $202,000.

Income for MLS purposes is broader than taxable income

This is where taxpayers most often get caught. Income for MLS purposes is the sum of your taxable income, total reportable fringe benefits, reportable employer super contributions (typically salary-sacrificed super), net investment losses (including negatively geared property), and any exempt foreign employment income. If you have a spouse, their corresponding amounts are added to yours for the family test.

A salary-packaged health worker on a $90,000 base can easily have income for MLS purposes above $117,000 once a novated lease and reportable fringe benefits are added in. A property investor with a negatively geared rental can find the loss is added back for this test, even though it reduced their taxable income.

What counts as appropriate hospital cover

The policy must be issued by a registered Australian health insurer and include private patient hospital cover. Extras-only cover (dental, optical, physiotherapy) does not qualify. The policy must have an excess of $750 or less for single policies, or $1,500 or less for couple and family policies. Travel insurance and overseas visitor cover do not count.

Cover must be held for the full income year to eliminate the surcharge entirely. If you take out a policy on 1 January, the MLS still applies for the days from 1 July to 31 December that you were uninsured. The surcharge is calculated on a daily basis.

Family and dependant rules catch people out

For MLS purposes, a family includes you, your spouse, and any dependants. A dependant is generally a child under 21 (or a full-time student aged 21 to 24) you maintain. Foster children are not included. If any family member lacks appropriate hospital cover, the surcharge can apply to the uninsured person for the uninsured days, even if the rest of the family is covered. One spouse with hospital cover and one without is a common trap.

How private health cover interacts with the MLS

The MLS is one of the main reasons higher-income households take out private hospital cover. For many earners, a basic hospital policy costs less than the surcharge would, which is often the trigger for the decision. That said, the economics depend on the premium you can secure, your age (Lifetime Health Cover loading applies to people who first take out cover after age 31), and your broader health needs.

Timing: when should cover start

If you expect to be above the MLS threshold for the year, cover should be in place from 1 July, not part-way through. A common scenario: a contractor has a strong quarter in April, realises income will push above $101,000 for the year, and takes out cover on 1 May. The surcharge still applies from 1 July to 30 April. Planning ahead of the financial year, rather than reacting to it, produces the cleaner result.

The private health insurance rebate is separate

The rebate is an income-tested contribution from the government toward your premium. It is not the same as the MLS, though both are income-tested and both relate to private health cover. A household can be entitled to a reduced rebate (because of higher income) and still avoid the MLS by holding appropriate cover. Your insurer's annual statement shows the information you need to reconcile both at lodgement.

Common situations that trip taxpayers up

Changing jobs, multiple employers, or moving to contracting

If you claim the tax-free threshold at more than one job, or move between PAYG and ABN work during the year, PAYG withholding rarely matches your final Medicare Levy position. Bonuses, termination payments, unused leave, and allowances can all lift taxable income into a new bracket and, for higher earners, tip income for MLS purposes above a threshold. The shortfall appears on assessment, not during the year.

Relationship changes

Starting a de facto relationship, marrying, or separating changes which threshold applies. Your status on 30 June is relevant for parts of the calculation, but the MLS also looks at periods within the year. A taxpayer who was single for most of the year and married in May may have the single threshold apply for the earlier period and the family threshold for the later period. A spouse's income, fringe benefits, and reportable super contributions all feed into the family test.

Blended families and shared care

Who counts as a dependant for MLS purposes depends on maintenance, not just where a child sleeps. In shared-care arrangements, both parents can sometimes count a child as a dependant if both genuinely maintain them, which raises the family threshold by $1,500 per child after the first for each parent. The safer approach is to check the maintenance test against the facts rather than assume the Family Tax Benefit arrangement flows through.

Salary packaging and reportable super contributions

Non-cash benefits that produce a reportable fringe benefits amount (novated leases, school fees via salary packaging in some industries, meal and entertainment cards) are added to taxable income for the MLS test. So are concessional super contributions made under a salary sacrifice arrangement. These are not mistakes or poor decisions, but they need to be built into the MLS projection rather than discovered at lodgement.

Property investors with negative gearing

A net investment loss reduces taxable income but is added back for MLS purposes. An Ipswich or wider South East Queensland investor with one or two negatively geared rentals and a moderate salary can find they are under $101,000 on their notice of assessment yet above the MLS threshold once the loss is added back in. This surprises investors who assumed their tax outcome indicated their surcharge position.

What to check before lodging

Most unexpected Medicare Levy and MLS bills come from missed information rather than unusual rules. A short pre-lodgement review usually catches the issue while there is still time to plan.

• All income sources are captured: wages, interest, dividends, managed fund distributions, rent, capital gains, business and partnership income, trust distributions, foreign income.
• Private health insurance statement is on hand. It shows the number of days of eligible hospital cover and the tax claim code, both of which feed the MLS calculation.
• Spouse details are complete: their taxable income, reportable fringe benefits, reportable super contributions, and net investment losses if any.
• Dependants are identified correctly for both the levy reduction test and the MLS family test. The tests use different definitions.
• If you claim an exemption, supporting documents (Medicare Entitlement Statement, medical exemption certificate) are ready.
• Reportable fringe benefits from your income statement are included. These are not in gross wages but they matter for MLS.

For sole traders, this is also the point to confirm that business deductions have been recorded and substantiated. Unclaimed deductions push taxable income higher than it needs to be, which in turn inflates the levy and can move you through an MLS tier.

Getting your Medicare Levy position right

The Medicare Levy is routine for most taxpayers. The Medicare Levy Surcharge is where the real planning work sits, because it depends on broader income measures, precise cover timing, and family facts that change during the year. For Ipswich households and businesses managing changing incomes, salary packaging, property investments, or relationship changes, a mid-year review is usually more valuable than a lodgement-time reaction.

If your income, family situation, or private health cover has changed during the year, or you are unsure whether the MLS applies to your circumstances, the team at Wiseman Accountants in Ipswich can review your position before 30 June and flag any adjustments worth making. Contact us for advice tailored to your situation.