Medicare Levy Surcharge vs Private Health Insurance: The Real Maths Behind the Decision (2026)

Every Australian earning above $93,000 faces the same question at tax time: should I pay the Medicare Levy Surcharge, or take out private hospital cover to avoid it? The answer isn't always obvious. The MLS can cost you between $930 and $3,600 a year depending on your income, but the cheapest complying hospital policy might cost less — or more — than the surcharge itself. This guide breaks down the actual numbers for the 2025–26 financial year, with worked dollar examples at every income level, so you can make the decision based on maths rather than guesswork.

What the Medicare Levy Surcharge Actually Is

Most Australians already pay the 2% Medicare Levy on their taxable income. That's the standard contribution to Australia's public health system, and almost everyone pays it regardless of whether they have private health insurance.

The Medicare Levy Surcharge (MLS) is something different entirely. It's an additional tax of between 1% and 1.5% that applies only to higher-income earners who don't hold a complying private hospital insurance policy. The purpose is blunt: the government wants higher earners to take pressure off the public hospital system by having private cover.

If you earn above $93,000 as a single (or $186,000 as a family) and you don't have private hospital cover, you'll pay the MLS on top of the standard 2% Medicare Levy. So your total Medicare-related tax could be as high as 3.5% of your income.

MLS Income Thresholds for 2025–26

The MLS rate increases with your income. Here are the thresholds for the 2025–26 financial year:

For families, the threshold increases by $1,500 for each dependent child after the first. So a family with three children would have their base threshold lifted from $186,000 to $189,000.

How MLS Income Is Calculated (It's Not Just Taxable Income)

This is where many people get caught out. Your "income for MLS purposes" is broader than your standard taxable income. The ATO calculates it as:

• Taxable income
• Reportable fringe benefits (the grossed-up amount shown on your payment summary)
• Reportable superannuation contributions (salary sacrifice amounts above the standard SG)
• Net investment losses (negative gearing losses you've claimed as deductions)

This is the same calculation the ATO uses for several income tests, but the key trap is reportable super contributions. If you salary sacrifice $10,000 into super, your taxable income drops by $10,000 — but your MLS income stays the same because the ATO adds those reportable super contributions back in.

Similarly, if you have a negatively geared investment property generating a $20,000 loss, that loss is added back to your income for MLS purposes. You can't use negative gearing to reduce your income below the MLS threshold.

The Real Dollar Comparison: MLS vs Private Hospital Cover

Let's run the actual numbers for three common scenarios in 2025–26.

Scenario 1: Single Person Earning $120,000

At $120,000, you fall into Tier 2 (1.25% MLS rate).

• MLS cost: $120,000 × 1.25% = $1,500 per year
• Cheapest complying hospital cover: approximately $1,200–$1,500 per year ($100–$125/month)
• Less the PHI rebate (16.405% at this income): roughly $1,005–$1,254 per year after rebate

Verdict: Private hospital cover is cheaper than the MLS by $250–$500 per year, and you get the benefit of actually having hospital cover. Taking out a basic policy is the clear winner here.

Scenario 2: Single Person Earning $160,000

At $160,000, you're in Tier 3 (1.5% MLS rate).

• MLS cost: $160,000 × 1.5% = $2,400 per year
• Cheapest complying hospital cover: approximately $1,200–$1,500 per year
• Less the PHI rebate (0% at this income): no rebate applies above $144,000 for singles

Verdict: Even without the rebate, hospital cover saves you $900–$1,200 per year compared to paying the MLS. At higher incomes, the gap widens significantly because the MLS is a percentage of your entire income while the insurance premium is a fixed dollar amount.

Scenario 3: Couple Earning $250,000 Combined

At $250,000 combined family income, you're in Tier 2 (1.25% MLS rate). The MLS is applied to the total family income.

• MLS cost: $250,000 × 1.25% = $3,125 per year
• Family hospital cover (cheapest complying): approximately $2,800–$3,600 per year ($230–$300/month)
• Less the PHI rebate (8.202% at this family income): roughly $2,570–$3,305 per year after rebate

Verdict: Hospital cover is roughly breakeven to slightly cheaper than the MLS. But you also get actual hospital cover for the family. For most couples in this range, taking out a basic family hospital policy makes sense.

What "Hospital Cover" Actually Means for MLS Purposes

Not just any health insurance policy will exempt you from the MLS. The policy must be a complying private hospital insurance policy, which means:

• It must be a hospital cover policy (not extras-only). Extras cover for dental, optical, and physio does not satisfy the MLS requirement, no matter how comprehensive it is.
• The policy excess must be $750 or less for singles or $1,500 or less for couples/families. If your excess is higher than this, the policy doesn't count.
• The policy must be held with a registered Australian health insurer. Overseas visitor cover or travel insurance doesn't count.

You need to hold the cover for the full financial year to get the full MLS exemption. If you take out cover part-way through the year, you'll pay a pro-rata MLS for the uncovered days. This means if you're thinking about taking out cover, don't wait until April — every uncovered day costs you.

The Lifetime Health Cover Loading: The Hidden Cost of Waiting

The MLS isn't the only penalty for not having private hospital cover. There's another one that catches people in their 30s and 40s: the Lifetime Health Cover (LHC) loading.

If you don't take out hospital cover by the 1 July following your 31st birthday, you'll pay a 2% loading on top of your hospital insurance premium for every year you delay, up to a maximum of 70%.

For example, if you first take out hospital cover at age 40, that's 9 years late (ages 31 through 39). Your LHC loading would be 9 × 2% = 18%. On a policy that costs $1,500 per year, the loading adds $270 per year to your premium. You pay this loading for 10 continuous years of holding hospital cover.

The LHC loading means that even if you don't need hospital cover right now, there's a compounding cost to delaying. If you're approaching 31 and your income is likely to climb above the MLS threshold in coming years, taking out basic hospital cover now locks in a 0% LHC loading permanently (as long as you maintain continuous cover).

The Private Health Insurance Rebate

The government provides a rebate on private health insurance premiums, which reduces your out-of-pocket cost. The rebate percentage depends on your age and income. For the 2025–26 financial year:

Higher rebates are available if you're aged 65–69 (the rebate percentages increase by roughly 8 percentage points) or 70 and over (roughly 12 percentage points higher). These higher age-based rebates apply at each income tier.

You can receive the rebate in two ways: as a premium reduction (your insurer reduces your premium by the rebate amount) or as a tax offset when you lodge your tax return. Most people choose the premium reduction because it lowers their monthly out-of-pocket cost immediately.

Common Strategies to Manage the MLS

1. The Cheapest Compliant Hospital Policy

The most common approach is simple: take out the cheapest possible hospital cover that meets the MLS requirements. Look for basic or bronze hospital policies with a $750 excess (singles) or $1,500 excess (families). These typically cover you for hospital admission but with restricted benefits — meaning the insurer pays a minimum amount and you might have out-of-pocket costs if you're actually admitted.

For a single person, expect to pay around $100–$130 per month before the rebate. For a family, around $230–$300 per month before the rebate. Shop around on comparison sites — premiums vary significantly between insurers for essentially the same MLS-avoiding function.

2. Salary Sacrifice Into Super (With a Warning)

Some people try to salary sacrifice into super to bring their taxable income below $93,000 and avoid the MLS. This does not work. As discussed above, reportable super contributions are added back to your income for MLS purposes. The ATO specifically designed this rule to prevent people from salary sacrificing their way out of the MLS.

Salary sacrifice is still excellent for building your retirement savings and reducing your overall tax, but it won't help you avoid the MLS.

3. Couples: Check Your Combined Income

For MLS purposes, if you have a spouse (married or de facto), the ATO uses your combined family income against the family thresholds — even if only one of you earns above the singles threshold. This can work for or against you:

• If one partner earns $130,000 and the other earns $40,000, the combined income is $170,000 — below the $186,000 family threshold. No MLS applies.
• But if both partners earn $100,000, the combined income is $200,000 — above the $186,000 family threshold. MLS of 1.0% applies to the total taxable income, split between both partners based on their individual income.

The family income test applies automatically once you have a spouse. You don't get to choose whether to be assessed as singles or as a couple — the ATO decides based on your relationship status.

4. Timing Your Cover

If you know you're going to breach the MLS threshold this financial year, take out hospital cover as early as possible. The MLS exemption is calculated on a daily basis. If you take out cover on 1 October instead of 1 July, you'll pay MLS for those three months (92 days) and only be exempt for the remaining 273 days.

When Private Health Insurance Actually Makes Financial Sense Beyond MLS

The MLS avoidance strategy treats health insurance as a tax tool. But there are genuine reasons you might want private hospital cover beyond just dodging the surcharge:

• Shorter wait times for elective surgery. Public hospital waiting lists for non-urgent procedures (knee replacements, hip replacements, cataract surgery) can stretch to 12–18 months or more. Private cover can get you treated in weeks.
• Choice of doctor and hospital. In the public system, you generally can't choose your surgeon. Private cover lets you choose your specialist and which hospital you're treated at.
• Private room. Most private policies include a private or semi-private room, rather than a shared ward.
• Extras cover for dental, optical, and allied health. This is separate from hospital cover and doesn't affect MLS, but many people bundle them. If you regularly use dental, optical, physio, or psychology services, extras cover can pay for itself.

The Five Biggest Mistakes People Make with the MLS

Mistake 1: Thinking Salary Sacrifice Avoids the MLS

As we've covered, reportable super contributions are added back to your income for MLS purposes. Every year, people salary sacrifice $10,000–$20,000 into super, see their taxable income drop below $93,000, and assume they're free of the MLS. Then they get an unexpected tax bill. Your payment summary shows reportable super contributions clearly — the ATO uses them in the MLS calculation automatically.

Mistake 2: Taking Out Extras-Only Cover and Assuming It Counts

Extras-only policies (dental, optical, physio) do not exempt you from the MLS. You need a hospital cover policy. Many people have extras-only cover through their employer or from years ago and assume they're covered. Check your policy type — it must include hospital cover with an excess of $750 or less (singles) or $1,500 or less (families).

Mistake 3: Forgetting the Lifetime Health Cover Loading

People in their early 30s often think they'll "sort out health insurance later." Every year past 31 without hospital cover adds 2% to your future premiums, and you pay that loading for 10 years when you eventually do take out cover. A person who waits until 45 to get hospital cover will pay 28% more than someone who took it out at 31. On a $1,500/year policy, that's an extra $4,200 over the 10-year loading period.

Mistake 4: Not Checking if a Partner's Income Pushes the Family Over the Threshold

Once you have a spouse or de facto partner, the ATO uses family income thresholds. A single person earning $90,000 has no MLS exposure. But if they move in with a partner earning $100,000, their combined family income of $190,000 exceeds the $186,000 family threshold, triggering a 1.0% MLS. Moving in together can create an unexpected tax liability if neither person has hospital cover.

Mistake 5: Paying for Comprehensive Cover When Basic Would Suffice

If your only goal is to avoid the MLS, there's no benefit to paying $3,000–$5,000 per year for gold hospital cover when a $1,200–$1,500 basic or bronze policy achieves exactly the same MLS exemption. Comprehensive cover makes sense if you actually plan to use private hospitals for specific procedures, but if you're healthy and simply want to avoid the surcharge, the cheapest complying policy is the rational choice.

A Decision Framework: Should You Get Private Hospital Cover?

Here's a practical decision tree based on the numbers:

The Bottom Line

For most Australians earning above $93,000, taking out a basic complying hospital policy is cheaper than paying the Medicare Levy Surcharge. The maths is straightforward: the MLS is a percentage of your entire income, while hospital cover is a fixed dollar amount. As your income rises, the gap between the two widens significantly in favour of holding a policy.

At $120,000, you'll save a few hundred dollars per year with basic hospital cover. At $160,000, the saving is closer to $1,000. At $200,000 and above, you'd be paying $3,000 or more in MLS when a $1,200–$1,500 policy would eliminate it entirely.

The exceptions are narrow: if you're just above the $93,000 threshold and the MLS only costs $930–$1,000, the cheapest hospital cover might be a wash or marginally more expensive. In that case, you might choose to pay the MLS and simplify your life. But even then, if you're under 31, the LHC loading argument pushes you towards getting cover early.

The decision comes down to a few key numbers: your MLS income, the MLS rate at that income, the cost of the cheapest complying hospital policy, the rebate percentage you're entitled to, and any LHC loading you'd face. Calculate each of those for your personal situation, compare the annual totals, and the answer will be clear. In the vast majority of cases, the hospital policy wins on pure cost — and you get actual hospital cover as a bonus.