Medicare Levy Surcharge vs Private Health (2025): Which Option Actually Saves You More Tax in Australia?

Medicare Levy Surcharge vs Private Health (2025): Which choice actually reduces your tax?

Australia 2025 · Clear comparison, costs, eligibility, and step-by-step guide

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TL;DR Summary

• Medicare Levy Surcharge (MLS) is an extra 1%–1.5% tax if you earn above the threshold and don’t have eligible private hospital cover.
• From 1 July 2025 thresholds lift to: Singles $101,000 / Families $202,000 (Tier 1), with higher tiers at $118k/$236k and $158k/$316k.
• Hospital cover (not extras) with a max permitted annual excess of $750 single / $1,500 family generally avoids MLS.
• Check if your annual premium minus rebate is less than your estimated MLS — if yes, cover may save money and give benefits.
• Don’t forget Lifetime Health Cover (LHC) loading: taking hospital cover after 31 can add up to 70% loading for 10 years.

Why this matters in Australia (2025)

With thresholds increasing from 1 July 2025, more Australians cross into MLS territory as wages rise. Paying MLS is a tax with no insurance benefits. Taking out eligible hospital cover can remove the surcharge and provide private care options. The right choice depends on your income tier, family status, age (rebate), and the net cost of premiums after the government rebate.

Comparison: Pay MLS vs Buy Private Hospital Cover

Feature	Pay MLS (no hospital cover)	Buy Private Hospital Cover
Up-front cost	1%–1.5% of MLS income; paid at tax time	Premiums (less private health insurance rebate depending on age/income)
What qualifies	N/A	Hospital cover only (extras doesn’t count). Policy excess ≤ $750 single / $1,500 family.
Health benefits	None (tax only)	Private treatment options, choice of doctor, potential shorter waits (policy dependent)
Risks / limits	If income rises, MLS grows automatically	Waiting periods, exclusions; premiums rise over time; choose cover carefully
Best for	Income just over threshold and hospital premium is higher than MLS, or you prefer Medicare only	Those who would otherwise pay MLS and want hospital benefits or to avoid LHC loading

Who is each option best for?

• Pay MLS: You rarely use hospital services, your income is only slightly above the threshold, and the cheapest suitable hospital cover (after rebate) would cost more than your estimated MLS.
• Buy Hospital Cover: Your MLS bill would exceed the net annual premium; you value private hospital options; or you want to avoid future LHC loading (if over 31 without cover).
• Family households: Remember the family threshold and the +$1,500 increase per dependent child after the first.

Step-by-step: How to decide (and apply)

1. Work out your 2025–26 MLS tier (from 1 July 2025):
   • Singles: ≤ $101,000 (no MLS); $101,001–$118,000 (1%); $118,001–$158,000 (1.25%); ≥ $158,001 (1.5%).
   • Families/couples: ≤ $202,000 (no MLS); $202,001–$236,000 (1%); $236,001–$316,000 (1.25%); ≥ $316,001 (1.5%).
   • Increase family thresholds by $1,500 per child after the first.
2. Estimate your MLS amount: MLS income × rate above (e.g., single on $120k ⇒ ~$1,500 at 1.25%).
3. Get quotes for “Basic/Bronze hospital” that meets MLS rules: Hospital cover only; policy excess ≤ $750 single / $1,500 family; extras-only won’t exempt you.
4. Apply the private health insurance rebate: Your premium may be reduced upfront by the age/income-based rebate; otherwise claim at tax time.
5. Compare net costs: If net premium < MLS, cover often makes financial sense (plus benefits). If higher, consider paying MLS — but factor in LHC if you’re 31+ without cover.
6. If buying: Start date matters. You’re only MLS-exempt for the days you held eligible hospital cover in the financial year.

Costs, rebates & tax considerations

• MLS rates: 1%, 1.25%, 1.5% depending on tier (from 1 July 2025 thresholds).
• Thresholds (from 1 July 2025): Singles $101k / $118k / $158k; Families $202k / $236k / $316k.
• What cover avoids MLS: Hospital cover with excess ≤ $750 single or ≤ $1,500 family; extras-only does not qualify.
• Private health insurance rebate (from 1 April 2025): For under-65s: up to ~24.288% (Base tier), reducing with income; 0% at the highest tier. Higher percentages for 65–69 and 70+.
• Lifetime Health Cover (LHC): If you first take hospital cover after 31, add 2% per year to premiums (max 70%), payable for 10 continuous years.
• Part-year cover: You only avoid MLS for the days you held eligible hospital cover in that financial year.

Quick example (single, Australia 2025–26):
Income $120,000 ⇒ MLS tier 2 (1.25%) ⇒ tax ~$1,500. If compliant Basic Hospital costs $1,450 after rebate, cover is cheaper and gives benefits. If premium is $1,800, paying MLS may be cheaper (but consider LHC).

FAQ (Australia 2025)

Do I need private health to avoid Medicare Levy Surcharge?

Yes — you need eligible private hospital cover. Extras-only policies don’t exempt you. Your policy excess must not exceed $750 (single) or $1,500 (family) per year for MLS purposes.

What are the Medicare Levy Surcharge income thresholds for 2025–26?

From 1 July 2025: Singles ≤ $101k (0%), $101,001–$118k (1%), $118,001–$158k (1.25%), ≥ $158,001 (1.5%). Families ≤ $202k / $202,001–$236k / $236,001–$316k / ≥ $316,001, with +$1,500 per child after the first.

Does extras cover avoid the MLS in Australia?

No. Only hospital cover from a registered Australian insurer qualifies for MLS exemption.

How does the private health insurance rebate work in 2025?

From 1 April 2025, rebates (Base Tier) are up to 24.288% for under-65s (higher for 65–69 and 70+), decreasing at higher income tiers. You can receive it as a premium reduction or claim as a tax offset at return time.

If I hold cover for part of the year, do I still pay MLS?

You’re exempt only for the days you held eligible hospital cover. You may owe MLS for uncovered days.

What is Lifetime Health Cover (LHC) loading and why does it matter?

LHC adds 2% per year to hospital premiums if you start after 31 (max 70%), payable for 10 continuous years. It can materially change the long-term cost of “going without”.

Is cheap Basic Hospital enough to avoid MLS?

Yes if it’s eligible hospital cover and the annual excess is ≤ $750/$1,500. But benefits are limited; compare policy restrictions and waiting periods.

Do reciprocal Medicare visitors need private health to avoid MLS?

If you earn over the MLS threshold, you generally need approved hospital cover to avoid MLS. Benefits may be limited; check details if you rely on reciprocal rights.

Sources / Official References

• PrivateHealth.gov.au — Medicare Levy Surcharge (thresholds 2025–26; what qualifies; excess limits)
• PrivateHealth.gov.au — Private Health Insurance Rebate (rebate percentages from 1 Apr 2025; thresholds from 1 Jul 2025)
• Services Australia — Private health insurance and Medicare (LHC overview)
• Australian Government — About private health insurance (LHC and hospital cover basics)

Important disclaimer

This article is for general information only and is not financial advice. Check official government resources or speak to a licensed financial adviser and your tax agent before making decisions.