If tax time feels like reading a setlist in a foreign language, you're not alone. For millions of Australians - especially creative professionals, sole traders, and freelancers - the Medicare Levy and Medicare Levy Surcharge are two line items on the tax return that raise more questions than answers. Are you paying too much? Should you have private health insurance? Do you even need to pay it at all?
Getting the wrong note here can cost you real money. But the good news is that once you understand how these levies work, you can make informed decisions and walk into tax time with confidence. Here's everything you need to know.
The Medicare Levy is a compulsory additional charge - set at 2% of your taxable income - that most Australian residents pay on top of their regular income tax. It's the mechanism that helps fund Australia's universal public healthcare system, Medicare, which covers general practitioner visits, specialist consultations, public hospital treatment, and access to subsidised medications through the Pharmaceutical Benefits Scheme (PBS).
Think of it as your membership fee for Australia's public health system - everyone chips in so the system keeps playing.
The levy was introduced on 1 February 1984 by the Hawke Labor Government under Treasurer Paul Keating. It started at just 1% of taxable income and has been gradually increased over the decades:
It's worth noting that while the Medicare Levy raises approximately $25–30 billion annually, total government health spending exceeds $100 billion per year. The shortfall is covered by general government revenue, meaning the levy alone doesn't carry the full weight of Australia's healthcare costs.
Most Australian residents pay the full 2% Medicare Levy. However, certain taxpayers are entitled to a reduction or full exemption, depending on their income and circumstances.
If your taxable income falls below the relevant threshold, you won't pay the Medicare Levy at all. If you sit within the phase-in range, you'll pay a reduced amount.
| Taxpayer Type | Lower Threshold (No Levy) | Upper Threshold (Full Levy) |
|---|---|---|
| General taxpayers | $28,011 | $35,013 |
| Seniors/pensioners (SAPTO) | $44,268 | $55,335 |
| Families | $45,907 | $57,383 |
| Families (SAPTO) | $59,886 | $74,857 |
For general taxpayers between the lower and upper thresholds, the levy phases in at 10 cents per dollar above the lower threshold. For families, the lower threshold increases by $4,216 for each dependent child.
Some taxpayers may qualify for a full exemption if they:
To claim an exemption, you'll generally need to provide a Medicare Entitlement Statement (MES) to the ATO.
The Medicare Levy Surcharge (MLS) is a separate and additional charge on top of the standard 2% Medicare Levy. It was first introduced in the 1997–98 financial year and applies specifically to higher-income earners who do not hold an appropriate level of private patient hospital cover.
The intent is straightforward: encouraging those who can afford private hospital insurance to use it, thereby easing pressure on the public system. If you're earning above the income threshold and you don't have qualifying hospital cover, the ATO will apply the surcharge when you lodge your tax return.
The Medicare Levy Surcharge is not a penalty - it's a policy lever. But for those who trigger it unexpectedly, it can feel very much like a flat note at the end of a great performance.
The MLS applies when two conditions are met simultaneously: your income exceeds the relevant threshold and you do not hold approved private hospital cover.
It's also critical to understand that income for MLS purposes is broader than just your taxable income. The ATO's definition also includes:
This broader definition catches many self-employed individuals and business owners off guard.
| Income Range | 2025–26 Rate | 2026–27 Rate |
|---|---|---|
| Up to $101,000 / $105,000 | 0% | 0% |
| $101,001–$118,000 / $105,001–$123,000 | 1% | 1% |
| $118,001–$158,000 / $123,001–$164,000 | 1.25% | 1.25% |
| $158,001+ / $164,001+ | 1.5% | 1.5% |
| Income Range | 2025–26 Rate | 2026–27 Rate |
|---|---|---|
| Up to $202,000 / $210,000 | 0% | 0% |
| $202,001–$236,000 / $210,001–$246,000 | 1% | 1% |
| $236,001–$316,000 / $246,001–$328,000 | 1.25% | 1.25% |
| $316,001+ / $328,001+ | 1.5% | 1.5% |
Family thresholds increase by $1,500 for each dependent child after the first child.
The MLS income thresholds are indexed and increase annually, which is why it's important to revisit your position each financial year rather than assuming last year's numbers still apply.
Yes - but only if it meets the ATO's requirements. Not all health insurance policies qualify as approved hospital cover for MLS purposes.
To be exempt from the Medicare Levy Surcharge, your hospital cover must:
The following will not get you off the hook:
For families, the hospital cover must also extend to your spouse and all dependent children - defined as children under 21, or full-time students under 25.
If you hold hospital cover for only part of the financial year, you'll receive a partial exemption and pay the surcharge only for the days you were without cover.
Having private health insurance doesn't exempt you from paying the 2% Medicare Levy itself - it only protects you from the additional Medicare Levy Surcharge. These are two distinct charges and it's a common point of confusion.
For employees under PAYG, the Medicare Levy is automatically withheld from pay throughout the year. But for sole traders, freelancers, and self-employed creatives, the calculation falls entirely on you - and it's settled when you lodge your income tax return.
The Medicare Levy is applied to your taxable income after all deductions have been claimed. Here's a simple example using the 2025–26 financial year:
Example Calculation:
If that same taxpayer earned above the MLS threshold and had no qualifying hospital cover, they would also owe the surcharge on top of this amount.
For sole traders, the business profit flows through to the personal tax return and is taxed at the individual's marginal rate, with the 2% Medicare Levy then applied to the total taxable income. This is why managing deductions and understanding your net taxable position matters so much - the levy applies to what's left after deductions, not gross revenue.
The ATO provides a Medicare Levy calculator on their website that factors in taxable income, spouse income, SAPTO eligibility, and any exemption days.
The Medicare Levy helps sustain one of the most comprehensive public healthcare systems in the world. For Australian residents, it means access to bulk-billed GP appointments, public hospital care, specialist consultations, and the PBS.
That said, the levy doesn't cover everything. With total government health spending far exceeding what the levy raises each year, it's a contribution to a much larger funding pool - not a standalone solution. Understanding this distinction helps frame why the surcharge exists: by encouraging private hospital cover uptake among higher-income earners, the system aims to preserve public resources for those who need them most.
The Medicare Levy and Medicare Levy Surcharge are two distinct - but related - components of the Australian tax system. The levy is a compulsory 2% charge that funds universal healthcare. The surcharge is an additional 1–1.5% charge that applies only to higher-income earners without qualifying private hospital cover. Income thresholds for the surcharge are indexed annually, meaning your position can shift even without a pay rise. And for self-employed individuals, both charges are calculated and settled at tax time, making accurate record-keeping essential throughout the year.
The Medicare Levy is a compulsory 2% charge applied to the taxable income of most Australian residents to help fund the public healthcare system. In contrast, the Medicare Levy Surcharge is an additional charge of 1% to 1.5% that applies only to higher-income earners who do not hold an appropriate level of private patient hospital cover.
For the 2026–27 financial year, the Medicare Levy Surcharge applies for singles earning above $105,000 and families earning above $210,000, provided they do not hold approved private patient hospital cover.
No. Only private patient hospital cover held with a registered Australian health insurer qualifies to avoid the surcharge. Extras-only policies or cover from non-registered international insurers do not count.
Yes. Unlike PAYG employees, who have the Medicare Levy withheld automatically from their pay, sole traders and self-employed individuals calculate and pay the levy as part of their annual income tax return, based on their taxable income after deductions.
Yes. Exemptions are available for foreign residents for tax purposes, those not eligible for Medicare benefits, blind pensioners, individuals entitled to full free medical treatment under the Veterans' Entitlements Act 1986, holders of a Veterans' Affairs Repatriation Health Card, and those receiving free medical treatment through Defence Force arrangements.
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