Most of the Australian tax system is built from marginal rates — cross a threshold and only the dollars above it are taxed differently. The Medicare levy surcharge is the deliberate exception. Cross its income threshold without private hospital cover and the surcharge applies to your entire income. It is a cliff, it is designed as a cliff, and its explicit purpose is to push higher earners into the private health system.
Understanding exactly where the cliff sits — and what counts as being on the right side of it — is worth real money to anyone earning near six figures.
The thresholds and tiers
For 2025–26 (the thresholds index each July), a single with no private hospital cover pays:
| Income for MLS purposes | Surcharge |
|---|---|
| Up to $101,000 | 0% |
| $101,001 – $118,000 | 1.0% |
| $118,001 – $158,000 | 1.25% |
| $158,001+ | 1.5% |
Family thresholds are double, plus $1,500 for each dependent child after the first. This surcharge is on top of the ordinary 2% Medicare levy that most taxpayers pay regardless.
The cliff arithmetic: at $102,000, an uninsured single owes 1% of the whole $102,000 — $1,020 — because they crossed the line by $1,000. Earning that last $1,000 cost more than it paid. This is one of very few places in the tax system where a pay rise can genuinely leave you behind, and it's why the MLS calculator matters near the thresholds.
Note also that "income for MLS purposes" is broader than taxable income: it adds back reportable fringe benefits, reportable super contributions and net investment losses. Salary sacrificing does not duck this one, and a negatively geared property can push you over the threshold rather than under it.
The insurance arbitrage
Here's the design working as intended: basic private hospital cover — the cheapest policy that exempts you from the surcharge — costs roughly $1,100–$1,400 a year for a single. At $110,000 income, the surcharge is $1,100. At $130,000 it's $1,625. At $160,000 it's $2,400.
So for incomes comfortably above the threshold, the junk-tier insurance is cheaper than the tax, and you get (nominally) something for it. This is not a loophole; it is the explicit policy mechanism. The market has responded with exactly what you'd expect: bare-bones "MLS avoidance" policies covering little more than the legal minimum. Whether that's good value healthcare is a separate question — as a pure tax play, the arithmetic above is the whole analysis.
Two honest caveats. First, if your income sits just over the line ($101,000–$110,000), the surcharge ($1,010–$1,100) and the cheapest policy cost about the same — the arbitrage is a wash, and other levers (below) may be cleaner. Second, hospital cover only exempts you if it's with a registered Australian insurer and carries an excess of $750 or less for singles ($1,500 for couples/families). Extras-only cover does not count.
The June trap
The surcharge is calculated daily. You're exempt only for the days you actually held hospital cover. Realising in May that you'll cross the threshold and buying insurance in June exempts you for those final weeks only — roughly 11 months of surcharge still applies. Every year, a wave of taxpayers discovers this at lodgement time.
The flip side: if you're taking cover purely for MLS purposes, it needs to be in place from 1 July to cover the full year. And for anyone approaching their 31st birthday, Lifetime Health Cover loading (2% extra premium per year of delay past 30, for ten years) is a second, separate reason the timing matters.
Legitimate ways to manage the threshold
If your income hovers near a tier boundary, the MLS-income definition gives you levers that move real money:
- Concessional super contributions reduce taxable income but are added back for MLS — no help here (unlike for ordinary income tax).
- Timing income — deferring a bonus, invoice or capital gain across 30 June — genuinely moves you between years and possibly under a threshold.
- Deductible expenses brought forward (prepaying income protection, work expenses) reduce MLS income directly.
- A spouse's income matters: couples are assessed on the family threshold ($202,000), which can rescue a high-earning single who marries a lower earner — or drag a modest earner into surcharge territory via their partner. Both partners need cover for either to be exempt.
The bottom line
If you earn under ~$101,000: the MLS is irrelevant; buy health insurance only if you want health insurance. Comfortably over: price the cheapest compliant hospital policy against your surcharge tier — the insurance usually wins, but only if it's in place for the whole year. Near the line: check the calculator with your true MLS income including fringe benefits, reportable super and investment losses, because that broader definition is where most surprises live.
Thresholds shown are the ATO's 2025–26 figures (2026–27 pending indexation). Policy excess limits per PHIO. General information, not tax or insurance advice.