If you earn more than $101,000 as a single or $202,000 as a family without eligible private hospital cover, you pay not just the 2% Medicare Levy but an additional Medicare Levy Surcharge (MLS) of 1% to 1.5% on your entire taxable income. For a single earner on $120,000, that means roughly $1,500 in MLS on top of $2,400 in Medicare Levy — a combined tax of $3,900. Basic hospital cover, by comparison, often costs around $1,200 to $1,500 per year. For many higher-income earners, buying hospital cover is cheaper than paying the MLS alone.
Here is exactly how each component works, what you pay at different income levels, and why it matters for your mortgage application.
Understanding the Medicare Levy: Everyone Pays (Mostly)
The Medicare Levy is a flat 2% of taxable income paid by most Australian taxpayers to help fund the public health system. It is calculated as part of your annual tax return. There are no exemptions based on income unless you fall below the low-income threshold.
Low-income earners may qualify for a full or partial exemption. For the 2025-26 income year, singles earning up to $26,000 (or families up to $54,591 including $2,507 per dependent child) pay no Medicare Levy. Between that threshold and the full-payment threshold, a phase-in rate applies so taxpayers contribute proportionally rather than dropping to zero suddenly.
For everyone above these thresholds, the full 2% applies. On a $100,000 income, the Medicare Levy is $2,000. On a $200,000 family income, it is $4,000. These amounts are withheld through PAYG or assessed at tax time and are largely unavoidable for most taxpayers.
What is the Medicare Levy Surcharge? The Tax on Not Having Hospital Cover
The MLS is an additional tax on top of the standard 2% Medicare Levy. It applies to taxpayers above specific income thresholds who do not hold an eligible private hospital insurance policy. The policy must be with a registered health insurer and provide cover in a public or private hospital. Extras-only policies — covering dental, optical, or physiotherapy — do not qualify. Neither does travel or overseas visitor health cover.
The MLS was introduced to encourage higher-income Australians to take up private health insurance, reducing demand on the public Medicare system. In practice, it functions as a financial penalty: either pay the surcharge or pay for a hospital policy. For many people, the policy costs less than the surcharge.
The critical number to know is the threshold. For 2025-26:
- Singles: MLS applies when taxable income (plus reportable fringe benefits and any net investment losses added back) exceeds $101,000
- Families/couples: the combined income threshold is $202,000, increasing by $1,500 for each dependent child after the first
If your income is above the threshold and you do not have an eligible private hospital policy for the entire year, the MLS applies for every day you were not covered.
How Much MLS Do You Actually Pay? The Three Rate Tiers
The surcharge is tiered, so higher income means a higher rate on the entire taxable income — not just the amount above the threshold.
For singles in 2025-26:
- Income up to $101,000: 0% (no surcharge)
- $101,001 to $118,000: 1.0% of taxable income
- $118,001 to $158,000: 1.25% of taxable income
- $158,001 and above: 1.5% of taxable income
For families, the same percentage tiers apply to the combined income, with the threshold starting at $202,000.
To put this in dollar terms, a single earner on $120,000 pays approximately $1,500 in MLS (1.25% × $120,000). Someone on $170,000 pays approximately $2,550 (1.5% × $170,000). A couple earning $250,000 combined without hospital cover pays approximately $3,750 in MLS (1.5% × $250,000).
The MLS is charged on the full taxable income, not just the dollars above the threshold. A single earner on $102,000 pays around $1,020 in MLS. This creates a cliff effect: crossing the $101,000 threshold by even one dollar triggers surcharge on the entire amount.
MLS vs Hospital Cover: The Real Cost Comparison
This is where the numbers get interesting. Basic hospital cover in Australia typically costs between $1,200 and $1,800 per year for a single adult, depending on the level of cover and excess chosen. For couples or families, costs range from roughly $2,400 to $3,600 annually.
Let us compare scenarios, using approximate 2025-26 dollars:
Single earning $110,000: MLS at 1.0% = $1,100. Basic hospital cover ≈ $1,200 to $1,400. Near break-even. The health cover gives you hospital access plus avoids the Lifetime Health Cover loading if you take it before age 31.
Single earning $140,000: MLS at 1.25% = $1,750. Basic hospital cover ≈ $1,200 to $1,500. The cover is cheaper than the tax.
Couple earning $240,000: MLS at 1.25% = $3,000. Couple hospital cover ≈ $2,400 to $3,000. Either break-even or slightly cheaper to take cover.
Single earning $180,000: MLS at 1.5% = $2,700. Basic hospital cover ≈ $1,200 to $1,500. The surcharge is nearly double the cost of insurance.
The pattern is clear: the higher your income, the more financially compelling hospital cover becomes. At the top MLS tier of 1.5%, buying insurance almost always costs less than paying the surcharge, and you get actual health cover in return.
There is a timing detail worth knowing. If you take hospital cover partway through the year, MLS applies only for the days you were uncovered. The tax system calculates MLS on a daily pro-rata basis against the number of days in the financial year you held eligible cover, so starting a policy mid-year still reduces the surcharge proportionally.
How MLS Affects Your Mortgage Application
This connection is often overlooked. When lenders assess your mortgage serviceability, they calculate your net income after tax and living expenses. The MLS is a tax — it reduces your after-tax income dollar for dollar. This directly lowers the income figure the bank uses for its borrowing capacity calculation.
A single borrower on $120,000 paying $1,500 in MLS has $125 less per month in net income than someone on the same salary with hospital cover. At APRA's 3% serviceability buffer assessment rate of approximately 9.2% to 9.5%, that $125 monthly reduction translates to roughly $13,000 to $15,000 less borrowing capacity.
For a couple on $240,000 paying $3,000 in MLS, the monthly net income reduction of $250 can reduce borrowing capacity by approximately $26,000 to $30,000.
The mechanism is straightforward: MLS reduces your income for tax purposes, the bank sees less net monthly cash, and your maximum loan amount drops. If you are planning to apply for a mortgage and your income is above the MLS threshold, arranging hospital cover before the application can improve both your actual cash flow and the bank's assessment of your serviceability.
Use our income tax calculator to model your exact Medicare Levy and MLS liability at your income level.
Strategies for Managing MLS Before a Mortgage Application
Arrange hospital cover before the financial year starts. MLS is calculated daily, so every day you hold cover reduces the surcharge. If you are planning to apply for a mortgage in the second half of 2026, getting cover in place now means your 2025-26 tax return will show a lower or zero MLS — and your borrowing assessment will reflect it.
Check if your extras-only policy qualifies. Many people hold extras cover (dental, optical) believing it exempts them from MLS. It does not. Only a hospital policy with a registered health insurer exempts you. Confirm your policy type with your fund before relying on it to avoid the surcharge.
Consider the excess trade-off. A higher excess reduces the premium but does not affect MLS status. If you are buying hospital cover primarily to avoid the surcharge, a policy with a high excess and a lower premium can be the lowest-cost path to exemption.
What About the 2026 Changes to Medicare and MLS?
The 2025-26 thresholds increased modestly from the prior year. The single threshold moved from approximately $97,000 in 2024-25 to $101,000 in 2025-26, reflecting indexation based on wage growth. The family threshold similarly increased from $194,000 to $202,000.
The 2026-27 thresholds have not yet been announced but can be expected to increase again. The rate tiers have not changed structurally — they remain at 1.0%, 1.25%, and 1.5% — and no legislative changes to MLS have been signalled for mid-2026.
The Lifetime Health Cover (LHC) loading remains relevant. If you do not take hospital cover by 1 July following your 31st birthday, a 2% loading applies to your premium for every year you delay, up to a maximum of 70%. This loading is separate from MLS but adds to the long-term cost of delaying hospital cover. The loading resets after 10 years of continuous cover.
FAQ
Is the Medicare Levy the same as the Medicare Levy Surcharge? No. The Medicare Levy is 2% of taxable income and applies to most taxpayers above the low-income threshold. The MLS is an additional 1% to 1.5% surcharge that applies to higher-income earners who do not hold eligible private hospital cover. They are separate items on your tax return.
Is the MLS calculated on taxable income or gross income? The MLS is calculated on your income for MLS purposes, which includes taxable income, reportable fringe benefits, and any net investment losses that were added back to your taxable income. Total superannuation contributions are excluded.
If my partner and I file separately, does the family threshold apply? The MLS assessment for couples looks at combined income against the family threshold, even if you file separate tax returns. If you are in a de facto relationship or married and living together, your incomes are combined for MLS purposes.
Does overseas visitor health cover exempt me from MLS? No. Overseas visitor health cover and travel insurance do not qualify as eligible private hospital cover for MLS purposes. Only a domestic hospital policy with a registered Australian health insurer exempts you. Temporary residents who do not qualify for Medicare may not be liable for MLS at all, but this depends on visa status and whether you are enrolled with Medicare.
Can I avoid MLS by taking cover partway through the year? Partially. MLS is calculated daily. If you take hospital cover on 1 January, you will pay MLS for 184 days (July to December) and be exempt for the remaining 181 days. The surcharge is reduced proportionally — you do not pay the full year amount.
What happens if my income crosses the MLS threshold unexpectedly? If a bonus, capital gain, or investment distribution pushes you above the threshold without you realising it during the year, you will owe MLS when you lodge your return. You cannot retrospectively take out hospital cover to avoid it. If your income is near the threshold and variable, maintaining cover year-round is the safer approach.
This article provides general information only and does not constitute financial, tax, or legal advice. Tax thresholds and MLS rates are current as at July 2026. Your personal circumstances may differ. For specific advice, consult a licensed tax professional or an Arrivau-licensed advisor — you can expect a response within one business day.