Earning Over $100,900? The 'Medicare Levy Surcharge' Trap (Don't Pay 1.5% Extra Tax)
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| Earning Over $97,000? |
Congratulations on your pay rise! If your taxable income has crossed the $100,900 threshold (Singles) or $201,800 (Families), you need to call an insurance broker immediately.
Why? Because the Australian Taxation Office (ATO) is about to hit you with an extra tax called the Medicare Levy Surcharge (MLS).
Many high earners realize too late that the cost of this "penalty tax" is actually higher than the cost of buying private health insurance. Here is how to do the math and save money in the 2025-2026 financial year.
1. What is the Medicare Levy Surcharge (MLS)?
Do not confuse this with the standard 2% Medicare Levy that everyone pays. The MLS is an additional 1% to 1.5% tax levied on high-income earners who do not have appropriate private hospital cover.
The government's logic is simple: "You make enough money. Stop using the public system and buy your own insurance."
2. The Income Tiers (2025-2026 Rates)
The penalty rate depends on how much you earn. The income thresholds are indexed annually, so staying updated is crucial. The more you make, the harder you are hit.
📊 The Penalty Brackets (Singles)
- Tier 1 ($100,901 - $117,500): 1.0% Surcharge ($1,009 - $1,175 Tax)
- Tier 2 ($117,501 - $156,666): 1.25% Surcharge ($1,468 - $1,958 Tax)
- Tier 3 ($156,667+): 1.5% Surcharge ($2,350+ Tax)
*Thresholds are estimated based on 2025-26 indexation.
3. The "Tax vs. Premium" Calculation
Here is why buying insurance is a no-brainer.
Imagine you earn $125,000 a year.
- Option A (No Insurance): You pay the 1.25% MLS penalty (Tier 2). That is approx $1,562 gone to the ATO. You get nothing in return.
- Option B (Buy Insurance): You buy a basic "Bronze" Hospital Cover policy for roughly $1,350 a year.
The Result: By choosing Option B, you avoid the $1,562 tax. You spent $1,350 on insurance instead. You are $212 richer, AND you now have private hospital coverage.
4. Crucial Rule: "Hospital Cover" Only
This is the most common mistake. Buying "Extras Only" (Dental/Optical) does NOT exempt you from the surcharge.
To escape the tax, you must hold a valid Hospital Cover policy with a standard excess (maximum $750 for singles) for the entire financial year. If you only hold it for 6 months, you still pay the tax for the other 6 months.
The Smartest Tax Move
If your salary is near the threshold, check your pay slip. Paying the Medicare Levy Surcharge is essentially a donation to the government.
Get a quote for basic hospital cover today. It is one of the few times in life where buying a product actually puts cash back in your pocket at tax time.
Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Income thresholds and tax rates are subject to change by the Australian Taxation Office (ATO). Please consult with a qualified accountant or tax professional before making financial decisions.
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