What is the Medicare levy? It is a 2% charge on the taxable income of most Australian resident taxpayers that helps fund the public health system, and the Australian Taxation Office calculates it as part of your annual income tax assessment. You do not lodge anything extra for it. If you are an employee, your employer's PAYG withholding usually includes an allowance for the levy across the year, so the amount shown on your notice of assessment is a reconciliation rather than a surprise.
This guide is for individuals who want to understand three separate things that often get confused: the levy itself, the reductions and exemptions that can lower or remove it, and the Medicare levy surcharge that applies to higher income earners without private patient hospital cover. Sole traders, couples with different incomes, families with dependent children and people who moved to or from Australia during the year all have specific wrinkles worth knowing.
What you need before you start: your taxable income for the year, your spouse's taxable income if you had one, the number of dependent children you maintained, your private health insurance annual tax statement if you held cover, and any reportable fringe benefits or reportable employer super contributions shown on your income statement. If you claim an exemption you also need evidence of the exemption category, such as a Medicare Entitlement Statement from Services Australia.
Understanding what is the Medicare levy, and how it differs from the surcharge, tells you whether taking out hospital cover would actually change your tax position or simply add a premium you do not need.
- The Medicare levy is a flat 2% of your taxable income for most Australian residents, worked out by the ATO when your return is assessed rather than as a separate bill.
- Low income earners can pay a reduced levy or none at all, and some people qualify for a full exemption category based on their circumstances, such as certain foreign residents or holders of a Medicare Entitlement Statement.
- The Medicare levy surcharge is separate. It applies only to higher income earners who go without an appropriate level of private patient hospital cover for all or part of the year.
- Surcharge liability is based on income for surcharge purposes, a wider figure than taxable income that adds reportable fringe benefits, reportable super contributions, total net investment losses and exempt foreign employment income.
- Keep your private health insurance statement, spouse income details and dependant details so the levy, the surcharge and the private health insurance rebate are all calculated correctly.
The calculation itself is simple: 2% of your taxable income, applied to the whole amount rather than in brackets. Taxable income is your assessable income less allowable deductions, so legitimate deductions reduce the levy base as well as your income tax. If you want to see how a specific claim flows through, the Australian tax deduction library sets out the rules for common expense types.
The ATO applies a low income reduction so the levy phases in rather than starting abruptly. Below the lower threshold no levy is payable, between the thresholds the levy is reduced, and above the upper threshold the full 2% applies. Separate, higher thresholds apply to seniors and pensioners eligible for the seniors and pensioners tax offset, and family thresholds increase for each dependent child.
| Income position | Levy outcome |
|---|---|
| Below the lower ATO threshold | No Medicare levy payable |
| Within the phase in range | Reduced levy, calculated on a sliding scale |
| Above the upper ATO threshold | Full 2% of taxable income |
| Approved exemption category | Full or half exemption for the qualifying days |
Check the current dollar thresholds on the ATO website each year, because they are indexed.
The Medicare levy surcharge is an additional tax on higher income earners who do not hold an appropriate level of private patient hospital cover. It sits on top of the 2% levy, not instead of it, and the ATO applies it at 1%, 1.25% or 1.5% depending on which income tier you fall into.
The difference matters. The levy is close to universal for Australian residents and is driven only by your taxable income and any exemption you qualify for. The surcharge is conditional: it applies only if two things are true at once, that your income for surcharge purposes exceeds the relevant threshold, and that you or a dependant went without hospital cover for some or all of the income year. Hold eligible cover for the full year and the surcharge does not apply, no matter how high your income.
People often ask what is the Medicare levy threshold, and the honest answer is that there are several. There are low income thresholds for reducing the levy, higher thresholds for seniors and pensioners, and completely separate surcharge thresholds for singles and for families. Mixing them up is the single most common source of confusion. A further point the comparison sites tend to skip: extras only policies, travel insurance and overseas visitor cover generally do not count as hospital cover for surcharge purposes, so holding a policy is not the same as being exempt from the levy surcharge.
There are only two lawful ways to avoid the Medicare levy surcharge. The first is to have income for surcharge purposes below the relevant ATO threshold for your family status. The second is to hold an appropriate level of private patient hospital cover for yourself and all your dependants for the whole income year. The ATO makes clear that the policy must be hospital cover issued by a registered Australian health insurer, and the excess on the policy must not exceed the ATO limit for singles or for couples and families.
How the surcharge works in practice is day based. If you hold cover for part of the year, the surcharge is charged only for the days you were uninsured, calculated as the relevant percentage of your income for surcharge purposes apportioned across those days. That is why a policy start date late in the financial year still reduces, but does not eliminate, the charge.
The levy itself is different. You cannot choose out of it. Reductions apply automatically based on income, and exemptions apply only to defined categories, such as certain foreign residents, people not entitled to Medicare benefits who hold a Medicare Entitlement Statement, and some Norfolk Island residents. Claiming an exemption you are not entitled to is not a planning strategy.
On timing, there is no separate surcharge deadline. It is assessed with your income tax return, so the usual lodgment dates apply: 31 October for self lodgers, or the later date your registered tax agent arranges. Deciding whether cover is worthwhile means comparing the annual premium after any rebate against the surcharge you would otherwise pay, and weighing the clinical value of the cover itself.
Income for surcharge purposes is broader than taxable income, and this is where people are caught out. According to the ATO, it is your taxable income plus reportable fringe benefits, plus reportable employer superannuation contributions and deductible personal super contributions, plus your total net investment loss from financial investments and rental properties, plus any exempt foreign employment income. Family trust distributions on which trustee tax has been paid are also included.
Two consequences follow. Salary sacrificing into super or into a novated lease does not reduce your exposure to the levy surcharge MLS, because those amounts are added back. Negatively geared property does not reduce it either, since the net rental loss is added back rather than deducted. Someone with a $95,000 taxable income and a $20,000 rental loss can still sit above the single threshold.
The ATO sets out four bands. The base tier sits below the first threshold and attracts no surcharge. Above it, tier 1 applies 1%, tier 2 applies 1.25% and tier 3 applies 1.5% of income for surcharge purposes. The family thresholds are double the single thresholds at each tier, and they increase for each dependent child after the first.
Unlike marginal tax rates, the surcharge is not stepped. Once you cross a threshold, the percentage applies to your entire income for surcharge purposes, so a small pay rise or a one off capital gain can cost more than it earns. That cliff effect is the strongest practical argument for checking your projected figure before June rather than after.
Confirm the current dollar thresholds and rates on the ATO's Medicare levy surcharge income thresholds and rates page, since they are reviewed annually and the levy surcharge MLS tiers have been paused and then indexed in different years.
Private hospital cover interacts with your tax in two directions. It can remove the surcharge, and it can attract the private health insurance rebate, a government contribution towards your premium that is itself income tested using the same tiers as the surcharge.
You can take the rebate as a reduced premium during the year or as a tax offset when you lodge. If you take reduced premiums but your income lands in a higher tier than you nominated, the ATO recovers the difference in your assessment, which produces an unexpected result for people whose income rises mid year.
Your insurer sends the ATO a private health insurance statement showing premiums paid, the rebate received and the number of days of hospital cover. Those figures usually prefill your return, and you should check them against your own records before lodging.
You are assessed on the family threshold if you had a spouse for all or part of the year, or if you were single but maintained a dependent child. The ATO's family threshold is double the single threshold at each tier, and it increases by a set amount for each dependent child after the first, so a family with three children has a higher entry point than a family with one.
A dependent child generally means a child under 21 whom you maintained, or a full time student under 25 whose adjusted taxable income was below the ATO limit. Every dependant must also be covered by the hospital policy. A common and expensive error is a family policy that excludes an adult child who is still a dependant for tax purposes, which leaves the whole family exposed to the surcharge for the uncovered days.
Couples are tested on combined income for surcharge purposes, not individual income. If your combined figure exceeds the family threshold and either of you lacked hospital cover, both of you can be liable, and each partner's surcharge is calculated on their own income at the tier set by the combined figure.
This produces uneven outcomes that surprise people. One partner earning $180,000 and another earning $40,000 are assessed on $220,000 combined, so a low income spouse can face a surcharge on their modest income. It also means separating during the year does not automatically move you to the single threshold, because the ATO applies the family threshold if you had a spouse at any point in the income year.
Accurate spouse income details in your return are therefore not optional data entry. They drive the threshold, the tier and the rebate tier.
Working out your tier takes three steps. Start with your taxable income, add back reportable fringe benefits, reportable and deductible super contributions, total net investment losses and exempt foreign employment income to reach income for surcharge purposes. Add your spouse's equivalent figure if you had one. Then compare the result with the current single or family threshold published by the ATO to find whether you sit in the base tier, tier 1, tier 2 or tier 3.
Two practical checks are worth doing before year end. Model the effect of a bonus, a redundancy payment or a capital gain, since any of these can push you across a threshold for the entire year. Then compare the surcharge at your tier against the annual premium for a compliant policy after the rebate. Our tax and pay calculators can help you sanity check the underlying income figures.
Eligibility for the 2% levy covers most Australian residents, with reductions for low income earners and exemptions for defined categories. The calculation uses taxable income for the levy, and the broader income for surcharge purposes for the surcharge tiers of 1%, 1.25% and 1.5%. Records that matter are your private health insurance statement, spouse income, dependant details and any Medicare Entitlement Statement. Confirm current thresholds with the ATO, and use Deductit's calculators and deduction guides to check your figures before you lodge or speak with a registered tax agent about your circumstances.
Do everyone pay the Medicare levy?
Most Australian resident taxpayers pay the Medicare levy, but not everyone. The ATO does not charge it where your taxable income is below the low income threshold, and it charges a reduced amount in the phase in range. Full and half exemptions apply to specific categories, including certain foreign residents, people who are not entitled to Medicare benefits and hold a Medicare Entitlement Statement from Services Australia, and some Defence Force members and their eligible family. Medicare itself covers listed medical services, most public hospital treatment as a public patient, and subsidised medicines under the Pharmaceutical Benefits Scheme, which is why entitlement to those benefits is the test for exemption.
How do I avoid paying Medicare levy?
You avoid the levy only by falling below the ATO income thresholds or by qualifying for a recognised exemption category, and an exemption needs supporting evidence such as a Medicare Entitlement Statement. Private health insurance does not remove the 2% levy. It only affects the surcharge, which is a separate charge on higher income earners without hospital cover.
Can a doctor help with what is the medicare levy?
A doctor cannot advise you on the levy, but a medical practitioner can be relevant to an exemption claim, for example where you are seeking a Medicare Entitlement Statement or documenting your entitlement status. For the tax treatment itself, rely on ATO guidance or a registered tax agent.
How much am I paying for the Medicare levy?
Your notice of assessment shows the exact levy charged, listed separately from income tax and from any surcharge. As a rough check, multiply your taxable income by 2%.
Why am I paying such a high Medicare levy?
A levy that looks unexpectedly high usually reflects one of three things: your taxable income rose, the amount includes the Medicare levy surcharge because you lacked hospital cover for part of the year, or PAYG withholding across the year did not cover the full liability. Compare the levy and surcharge lines on your assessment to see which applies.
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