Medicare Levy Surcharge vs. Private Health Insurance: Which Costs Less? (2025-26)
Published by SWIFT ACCOUNTANTS PTY LTD · Last reviewed
Australians who earn above $93,000 and do not hold an appropriate private hospital insurance policy must pay the Medicare Levy Surcharge (MLS) — an additional 1% to 1.5% of income on top of the standard 2% Medicare Levy. At higher income levels, the surcharge costs more than a private hospital policy. This guide explains the tiers, runs the numbers, and helps you decide which approach makes financial sense for your income and circumstances.
What Is the Medicare Levy Surcharge?
The Medicare Levy Surcharge (MLS) is an additional tax levied on higher-income Australians who do not hold appropriate private hospital cover. It was introduced to encourage higher-income earners to use the private health system and reduce pressure on the public Medicare system. The MLS is charged on top of the standard 2% Medicare Levy that applies to most taxpayers.
For the 2025-26 financial year, the MLS tiers are:
Tier 1
$93,001 – $108,000
1.0%
e.g. $100k = $1,000 MLS
Tier 2
$108,001 – $144,000
1.25%
e.g. $120k = $1,500 MLS
Tier 3
$144,001+
1.5%
e.g. $150k = $2,250 MLS
The MLS thresholds are indexed each year. For families, the thresholds are higher — $186,000 combined for couples, plus $1,500 for each dependent child after the first. The ATO calculates the MLS automatically when you lodge your tax return and indicate you did not hold appropriate hospital cover for the full year. Detailed ATO guidance is at ato.gov.au — Medicare Levy Surcharge.
MLS vs. Private Health Cover: Side-by-Side Comparison
The following table compares the Medicare Levy Surcharge cost against the approximate annual cost of a basic private hospital policy for a single adult. Private health premiums vary significantly by age, state, fund, and level of cover — the figures below are indicative for a 35-40 year old single adult.
| Income | Annual MLS Cost | Basic Hospital Cover (est.) | Cheaper Option |
|---|---|---|---|
| $93,001 | $930 | ~$1,200 – $1,800 | MLS (just above threshold — depends on age and fund) |
| $100,000 | $1,000 | ~$1,200 – $1,800 | Borderline — compare policies vs MLS at your age |
| $120,000 | $1,500 | ~$1,200 – $1,800 | Private health insurance (usually) |
| $150,000 | $2,250 | ~$1,200 – $1,800 | Private health insurance (clearly cheaper) |
| $200,000 | $3,000 | ~$1,200 – $1,800 | Private health insurance (clearly cheaper) |
Premium estimates are for a basic hospital-only policy (Bronze or Basic tier) for a single adult aged 35-40 with a $500 excess, before the Private Health Insurance Rebate. Younger adults may find cheaper policies; older adults or those in NSW/VIC may face higher premiums. Compare at privatehealth.gov.au.
What Counts as Appropriate Private Hospital Cover?
Not every private health policy exempts you from the Medicare Levy Surcharge. The ATO's definition of "appropriate private health insurance cover" requires all of the following:
- The policy must be hospital cover (not extras-only cover). Extras-only dental, optical, or physiotherapy policies do not qualify.
- The policy must be from a registered Australian health insurer — overseas policies or employer self-insurance arrangements generally do not qualify.
- The excess on the policy must be no more than $750 for singles or $1,500 for couples or families. Policies with higher excesses — even if they still provide hospital cover — do not meet the MLS exemption requirement.
This is an important nuance that catches many policyholders. If you chose a hospital policy with a $1,000 excess to reduce your premium, you may have inadvertently lost your MLS exemption. When comparing policies, the excess threshold is the key variable to verify.
The government runs a comparison website at privatehealth.gov.au where you can compare registered Australian health funds and filter policies by coverage type and excess.
The Private Health Insurance Rebate
The Australian government subsidises private health insurance premiums through the Private Health Insurance Rebate. The rebate amount depends on your income and age. For 2025-26, the base rebate rates are approximately:
- Income up to $93,000 (singles): up to 24.608% rebate (age-adjusted — higher for those over 65 and 70)
- Income $93,001 to $108,000 (Tier 1): reduced rebate
- Income $108,001 to $144,000 (Tier 2): further reduced rebate
- Income $144,001+ (Tier 3): no rebate
For those in Tier 3 (income over $144,000), there is no government rebate on the private health premium. At this income level, the MLS would be $2,160 or more per year, while a basic hospital policy costs $1,200 to $1,800 — making private health insurance clearly the better financial choice even without a rebate.
The rebate can be applied as a premium reduction (the insurer charges you less each month) or claimed as a tax offset when lodging your annual tax return. Choosing the premium reduction is administratively simpler for most people.
Lifetime Health Cover Loading: Don't Leave It Too Late
Beyond the MLS, there is a second financial incentive to obtain private hospital cover early: the Lifetime Health Cover (LHC) loading. If you do not take out and maintain hospital cover by 1 July following your 31st birthday, you will pay an additional 2% on your hospital premium for every year after age 30 that you go without cover.
The LHC loading is capped at 70% and applies for 10 continuous years after you take out cover — after which it is removed. Some practical examples:
- Take out hospital cover at 35: 10% LHC loading for 10 years
- Take out hospital cover at 40: 20% LHC loading for 10 years
- Take out hospital cover at 45: 30% LHC loading for 10 years
- Take out hospital cover at 65 (first time): 70% LHC loading (capped) for 10 years
If a basic hospital policy costs $1,500 per year and you take it out at 40 with a 20% LHC loading, you pay $1,800 per year for the first 10 years — an extra $3,000 total compared to someone who joined at 30. For individuals approaching 31 who are weighing whether to take out hospital cover, the LHC loading is an important long-term cost consideration independent of the MLS.
When Does Paying the MLS Make Sense?
There are limited situations where paying the MLS may be rational:
- Your income is just above the $93,000 threshold and you are young (under 31), so the LHC loading has not yet commenced. At $93,001 the MLS is only $930 — below the minimum cost of a basic hospital policy in many states.
- You have a short-term income spike (e.g., a one-off capital gain) that pushes you above the threshold for a single year. Taking out cover partway through the year reduces the MLS for the proportion of the year you held cover.
- You hold philosophical or healthcare-related objections to using the private system.
In all other cases, once income reaches $108,000 or above, the MLS cost of $1,350 to $3,000+ per year consistently exceeds the cost of a qualifying basic hospital policy. Taking out appropriate cover is almost always the financially superior decision at these income levels — and it also provides access to private hospital treatment.