Higher-income Australians face an extra tax if they don’t hold eligible private hospital cover. The Medicare Levy Surcharge can add up to 1.5% to your annual tax bill — that’s $2,160 extra tax on a $144,000 salary.
The surcharge affects around 13% of Australian taxpayers, with most unaware they’re paying until tax time arrives. Many discover they could have bought basic hospital cover for less than their MLS liability.
You need to understand the thresholds, calculate the real cost, and decide whether buying hospital cover makes financial sense. This guide shows you the current rates, walks through worked examples, and gives you a simple checklist to make the right choice for your situation.
The decision becomes more complex each year as health insurance premiums rise and MLS thresholds increase. Getting this wrong costs hundreds or thousands annually.
What the Medicare Levy Surcharge is — and who it affects
Quick definition
The Medicare Levy Surcharge (MLS) is an additional tax on top of the standard 2% Medicare levy. It applies to taxpayers without eligible private hospital cover who earn above certain income thresholds.
The surcharge was introduced in 1997 to encourage higher-income earners to take pressure off the public health system. Unlike the Medicare levy, which funds public healthcare, MLS revenue goes into general government funds.
Your MLS liability depends on your income level and family situation. The government reviews thresholds annually, typically adjusting them for inflation.
Who pays
The surcharge targets higher-income earners:
- Singles earning more than $93,000
- Couples and families with combined income over $186,000
- Single parents with income above $93,000
- Families with dependent children get an extra $1,500 threshold per child after the first
The surcharge is calculated as a percentage of your “income for MLS purposes” — which includes taxable income plus reportable fringe benefits, reportable superannuation contributions, and exempt foreign employment income.
This broader income definition often catches taxpayers off guard. Your salary might be $92,000, but additional benefits push your MLS income over the $93,000 threshold.
Investment income, rental profits, and capital gains also count toward MLS income. Even income from overseas sources that doesn’t appear on your Australian tax return gets included in the calculation.
A single earner on $120,000 with no hospital cover would pay MLS on their full income. This creates a strong incentive to either buy private hospital cover or accept the tax penalty.
Current thresholds and rates for Medicare Levy Surcharge hospital cover Australia
Income thresholds and MLS rates
| Income Threshold | Singles | Couples/Families | MLS Rate |
|---|---|---|---|
| Tier 1 | $93,001 – $108,000 | $186,001 – $216,000 | 1.0% |
| Tier 2 | $108,001 – $144,000 | $216,001 – $288,000 | 1.25% |
| Tier 3 | $144,001+ | $288,001+ | 1.5% |
For families, add $1,500 to the threshold for each dependent child after the first. So a couple with two children would have thresholds of $189,000, $219,000, and $291,000.
Worked examples
Single on $125,000
This person falls into Tier 2, paying 1.25% MLS. Annual MLS = $125,000 × 1.25% = $1,563
A basic hospital policy might cost $1,200-$1,800 annually. The MLS exceeds many basic premium costs, making hospital cover potentially worthwhile.
However, you must factor in out-of-pocket costs. Basic policies often have high excess payments ($500-$750 per admission) and limited coverage for prosthetics or medical devices.
The private health insurance rebate reduces premiums by up to 32.8% depending on income and age. A $1,500 premium might cost just $1,000 after rebates for some taxpayers.
Family with combined $240,000 income (two adults, one child)
The family threshold becomes $187,500 ($186,000 + $1,500 for one child). They fall into Tier 2 at 1.25%. Annual MLS = $240,000 × 1.25% = $3,000
Family hospital cover costs $2,400-$4,800 annually depending on the policy. The MLS amount falls within the premium range, requiring careful comparison.
This family could choose a mid-tier policy with better benefits for roughly the same cost as paying MLS. They gain access to private hospitals, shorter waiting times, and choice of doctor.
What counts as eligible private hospital cover
Short checklist for verifying your policy
To avoid MLS, your policy must include:
- Hospital cover (not extras-only)
- Coverage for the full financial year
- Appropriate single or family classification matching your tax situation
Check your policy certificate or contact your insurer to confirm these details. The policy must be active on June 30 to count for the full financial year.
Pitfalls to avoid
- Extras-only policies don’t count: Dental, optical, and physiotherapy cover won’t exempt you from MLS. You need hospital admission benefits.
- Coverage gaps create problems: Even short lapses in hospital cover mean you pay MLS for the entire year.
- Family vs single mismatches cause issues: If you’re married or have dependents, singles cover won’t protect your family from MLS.
When hospital cover saves you tax
Scenario A — single on $130,000
This person pays Tier 2 MLS at 1.25%. Annual MLS = $130,000 × 1.25% = $1,625
Basic hospital cover costs approximately $1,400-$2,000 annually. The MLS matches or exceeds premium costs, making hospital cover financially sensible.
The break-even point occurs when annual premiums equal the MLS amount. Above this income level, hospital cover delivers tax savings plus health benefits.
Beyond the tax saving, hospital cover provides additional value. Private patients can choose their surgeon, avoid long waiting lists for elective surgery, and access private rooms in many hospitals.
Age-based discounts apply to hospital cover premiums. Younger adults often find basic policies cost significantly less than their MLS liability, creating substantial savings.
Scenario B — couple earning $230,000
They exceed the $186,000 couple threshold and pay Tier 2 MLS at 1.25%. Annual MLS = $230,000 × 1.25% = $2,875
Couple hospital cover ranges from $2,200-$4,500 annually. At this income level, mid-range hospital policies cost similar to the MLS, making the choice depend on health needs and policy benefits.
The couple saves money with basic hospital cover while gaining private healthcare access and avoiding public hospital waiting lists.
Premium costs vary significantly by state. Queensland and Western Australia typically have lower premiums than New South Wales or Victoria. Location affects both insurance costs and MLS calculations.
When hospital cover doesn’t save you tax
Common cost traps
- Waiting periods delay benefits: Most hospital services have 12-month waiting periods. You pay premiums but can’t claim benefits immediately.
- Lifetime Health Cover loading increases premiums: If you’re over 31 without prior hospital cover, you pay 2% extra per year of delay, capped at 70%.
- Family policies cost more than singles cover: The premium jump from singles to family cover might exceed your MLS liability.
Alternatives to consider
Keep Medicare and pay MLS
If premiums significantly exceed MLS, paying the surcharge might make sense short-term.
This approach works best for healthy individuals just over the income threshold. You avoid insurance overhead costs and have immediate access to funds for medical emergencies.
However, paying MLS provides no health benefits. You remain in public hospital queues and have no choice over treatment timing or providers.
Save the premium difference
Put money aside for potential private medical costs instead of paying insurance premiums.
Set up a dedicated medical savings account with the premium amount. This strategy gives you control over healthcare spending and earns interest on unused funds.
The risk involves major medical events. Without insurance, a complex surgery could cost $20,000-$50,000 privately. Your savings account might not cover these expenses.
Buy targeted cover later
Purchase hospital cover when you actually need elective surgery, accepting waiting periods.
Most non-emergency procedures have 12-month waiting periods. Plan ahead if you know surgery is needed but not urgent.
Consider your health status, family medical history, and financial priorities when making this choice.
Your age plays a crucial role in this decision. Older Australians face higher premiums and increased likelihood of needing hospital treatment. Younger people might prefer paying MLS short-term while building wealth.
Employment changes affect MLS calculations. Job loss or reduced hours might drop you below thresholds mid-year, but you still need hospital cover by June 30 to avoid the surcharge entirely.
Practical next steps
6-point checklist
- Check current ATO income thresholds for your situation
- Calculate your potential MLS using the ATO online calculator
- Verify your existing policy covers hospital (not extras-only)
- Compare 12-month premium costs with annual MLS liability
- Review dependent coverage if you have a family
- Speak with your insurer or tax adviser about specific circumstances
FAQs
Does extras cover count?
No. Only hospital cover exempts you from MLS.
What if my partner has cover?
Both partners need appropriate cover. One person’s policy doesn’t cover the other for MLS purposes.
How are dependents counted?
Each dependent child after the first adds $1,500 to your income threshold.
When does cover need to start?
You need hospital cover by June 30 to avoid MLS for that financial year.
Can I backdate hospital cover?
No. Coverage gaps mean you pay MLS for the entire year regardless of when you buy cover.
Conclusion
Buying hospital cover can remove the Medicare Levy Surcharge, but you must compare annual premiums with your surcharge liability. Check policy types, waiting periods, and family coverage requirements before deciding.
Run the MLS calculator and compare the annual premium versus the Medicare Levy Surcharge hospital cover Australia requirements for your household. This comparison reveals whether private cover delivers genuine tax savings or just shifts costs from tax to premiums.
Next step: Visit the ATO MLS page for current thresholds and contact private health insurers for personalized quotes. Consider speaking with a tax adviser if your situation involves complex income sources or family arrangements.
