Medicare Levy Guide 2026-27

How the 2% Medicare levy works in Australia for 2026-27: low-income shade-in thresholds, exemption categories and how to avoid the Medicare Levy Surcharge.

By Mottalib Radif, MBA · Updated June 2026

What Is the Medicare Levy?

The Medicare levy is a 2% charge on your taxable income that helps fund Australia's universal public healthcare system, Medicare. Introduced in 1984 under the Hawke government, the levy replaced the earlier Medibank levy and has been a permanent feature of the Australian tax landscape for over four decades. It is collected through the PAYG (Pay As You Go) withholding system alongside your income tax, which means most employees see it deducted automatically from every paycheck without needing to do anything separately.

Medicare provides all Australian residents with free or subsidised access to a range of healthcare services, including treatment in public hospitals, subsidised out-of-hospital medical services (such as GP visits, specialist consultations, and diagnostic tests through the Medicare Benefits Schedule), and subsidised prescription medicines through the Pharmaceutical Benefits Scheme (PBS). The levy funds a significant portion of this spending, though general taxation revenue supplements it to cover the full cost of Australia's public health system, which totals over $100 billion annually at state and federal levels combined.

The levy is calculated as a flat 2% of your total taxable income, with no bracket structure. This makes it simpler than income tax: at $60 000, you pay $1 200; at $100 000, you pay $2 000; at $200 000, you pay $4 000. The rate has been 2% since 1 July 2014, when it was increased from 1.5% to partially fund the National Disability Insurance Scheme (NDIS). Prior to that, the rate had been 1.5% since 1995.

While the levy is straightforward at most income levels, two important mechanisms add complexity: the low-income shade-in (which reduces or eliminates the levy for low earners) and the Medicare Levy Surcharge (MLS), which imposes an additional 1% to 1.5% on higher earners who do not hold private hospital insurance.

Who Pays the Medicare Levy?

All Australian residents for tax purposes pay the Medicare levy, unless they qualify for a specific exemption or reduction. This includes Australian citizens, permanent residents, and holders of certain visa categories that entitle them to Medicare benefits. The key determinant is your tax residency status, not your citizenship or visa type. You can be a tax resident (and pay the levy) while holding a foreign passport, and you can be a non-resident (exempt from the levy) while being an Australian citizen living abroad.

Non-residents for tax purposes and temporary visa holders who are not eligible for Medicare do not pay the levy. However, they also cannot access Medicare-funded healthcare services. Determining your residency status involves multiple factors: where you ordinarily reside, the duration and purpose of your stay, the location of your family and social ties, and whether you maintain a permanent home in Australia. If your status is uncertain, the ATO provides an online residency determination tool, or you can apply for a private ruling.

Low-Income Reduction (Shade-In)

If your taxable income falls below certain thresholds, you may pay a reduced levy or no levy at all. This is known as the "shade-in" because the levy gradually increases (shades in) as income rises from the no-levy threshold to the full-levy threshold, preventing a sudden jump in tax liability.

How the Shade-In Calculation Works

Within the shade-in range, the levy is calculated at 10% of the amount by which your taxable income exceeds the lower threshold, rather than 2% of your total income. This ensures a gradual transition from zero to the full levy. Here is how it works at different income levels for a single person:

• $25 000: Below the $26 000 threshold. Medicare levy: $0.
• $27 000: In the shade-in range. Levy = ($27 000 - $26 000) x 10% = $100. This is less than the full 2% of $27 000, which would be $540.
• $29 000: Levy = ($29 000 - $26 000) x 10% = $300. Full 2% would be $580.
• $32 500: The shade-in and the full 2% converge. Levy = ($32 500 - $26 000) x 10% = $650, which equals $32 500 x 2%.
• $35 000: Above the shade-in range. Full 2% applies: $700.

The shade-in affects approximately 1.5 million low-income taxpayers, including many part-time workers, students with part-time employment, and retirees with modest income from investments or the Age Pension.

Medicare Levy Surcharge (MLS)

The Medicare Levy Surcharge is a separate charge from the standard 2% Medicare levy. It applies to higher-income taxpayers who do not hold an appropriate level of private hospital insurance. The MLS was introduced in 1997 by the Howard government as part of a broader strategy to encourage private health insurance uptake, reduce demand on the public hospital system, and shift some healthcare costs to the private sector.

The surcharge is based on your income for MLS purposes, which includes taxable income, reportable fringe benefits, total net investment losses (negative gearing losses added back), and reportable super contributions. This broader income definition prevents people from using salary packaging, negative gearing, or super contributions to artificially reduce their MLS income below the thresholds.

MLS Income Tiers 2025-26

Family thresholds increase by $1 500 for each Medicare levy surcharge dependent child after the first. For MLS purposes, a couple's combined income is used even if only one partner exceeds the individual threshold.

How to Avoid the MLS: The Private Health Insurance Decision

The most straightforward way to avoid the MLS is to hold a complying private health insurance policy with hospital cover for the entire financial year. To qualify, the policy must provide at least a basic level of hospital cover (known as "Basic" tier or above under the government's tiered system) with a registered Australian health fund. Extras-only policies covering dental, optical, physiotherapy, or other ancillary services do not satisfy the MLS requirements. If you hold hospital cover for only part of the year, the MLS is calculated on a pro-rata basis for the uncovered days.

The financial case for private health insurance becomes increasingly compelling as income rises above the MLS thresholds. The table below compares the annual cost of the MLS against the approximate cost of a basic hospital policy for a single person under 40:

MLS vs Private Health Insurance: Detailed Cost Comparison

Basic hospital policy costs are approximate for a single person under 40. Actual premiums vary by fund, state, excess level, and age. The PHI rebate (24.608% for under-65s earning less than $93 000) reduces premiums further for eligible individuals.

For most people earning above approximately $110 000, a basic hospital policy costs less than the MLS while also providing access to private hospital treatment, shorter waiting times for elective surgery, and choice of doctor. Even at income levels just above the threshold ($93 001 to $108 000), where the MLS may be slightly cheaper than a basic policy, many workers choose PHI because the cost difference is small and the insurance provides tangible health benefits.

Private Health Insurance Rebate

The Australian Government provides an income-tested rebate to help offset the cost of private health insurance premiums. The rebate is applied as a percentage reduction to your premiums (either as a direct discount applied by your health fund or as a refundable tax offset claimed when you lodge your return).

Rebate percentages are updated annually on 1 April. Family income thresholds are double the single thresholds.

For a single person under 65 earning $85 000 per year, the base rebate of 24.608% reduces a $1 500 annual premium to approximately $1 131, making private health insurance more affordable. Above $144 000 (single), the rebate is zero, meaning you pay the full premium, but at this income level the MLS saving from holding cover ($2 160+) far exceeds the premium cost.

Lifetime Health Cover (LHC) Loading

Lifetime Health Cover is a government initiative that encourages Australians to take out private hospital insurance early in life and maintain it continuously. The loading adds 2% to your hospital cover premiums for every year you are aged over 30 on 1 July without holding hospital cover. The loading is capped at 70% (reached at age 65) and is removed after you have held hospital cover continuously for 10 years.

For example, if you first take out hospital cover at age 40, you will pay a 20% LHC loading on top of the base premium (2% x 10 years over 30). On a $1 500 base premium, the loading adds $300, making your annual premium $1 800. If you wait until age 50, the loading is 40%, adding $600 for a total of $2 100 per year. This loading continues for 10 consecutive years of cover, after which it is removed and you pay the base premium.

The LHC loading creates a financial incentive to take out hospital cover before turning 31, even if you are young and healthy and do not anticipate needing hospital treatment. A 30-year-old who takes out cover at $1 200 per year pays $12 000 over the first 10 years. A 40-year-old who delayed pays approximately $18 000 over the same period (higher base premiums due to age plus the 20% loading). The lifetime savings from avoiding the loading can be substantial.

Medicare Levy Exemptions

You may be fully or partially exempt from the Medicare levy if you meet certain criteria:

• Non-resident for the entire year: If you were a non-resident for tax purposes for the full financial year, you are exempt from the Medicare levy. You must complete the Medicare levy exemption section of your tax return. Non-residents cannot access Medicare services unless they hold a visa entitling them to Medicare or are from a country with a reciprocal healthcare agreement.
• Part-year residents: If you arrived in or departed from Australia during the financial year, the levy is calculated on a pro-rata basis. You pay the levy only for the period you were an Australian resident, and the exemption applies to the non-resident period.
• Medicare Levy Exemption Certificate: Certain temporary visa holders and foreign residents who are not eligible for Medicare can apply for an exemption certificate from Services Australia. This is common for workers on 457/482 temporary skill shortage visas who are not covered by a reciprocal healthcare agreement.
• Defence Force members: Members of the Australian Defence Force and certain veterans may qualify for exemptions during periods of service, as they receive healthcare through the Defence Force health system.
• Norfolk Island residents: Norfolk Island residents have specific Medicare arrangements and may qualify for exemption depending on their coverage.

Historical Changes to the Medicare Levy

The Medicare levy has evolved significantly since its introduction. Understanding this history helps explain the current 2% rate and the likelihood of future changes:

The MLS thresholds have been adjusted periodically to account for wage growth. The most recent substantial change occurred in the 2023-24 Budget, when the base tier threshold was increased from $90 000 to $93 000 for singles and from $180 000 to $186 000 for families. These adjustments prevent "bracket creep" where nominal wage increases push more taxpayers into the MLS net without any real increase in their purchasing power.

Total Medicare Costs at Common Salary Levels

"Total (with PHI)" assumes the MLS is eliminated by holding complying hospital cover. The cost of PHI premiums is not included; it is a separate expense but is typically $1 200-$1 500/year for a basic hospital policy.

Common Misconceptions

• "The Medicare levy pays for all my healthcare." The levy covers only a portion of total public healthcare spending. The remainder comes from general taxation revenue, state government funding, and patient co-payments. Having Medicare does not mean all medical costs are free; many specialist services, dental care, and allied health treatments involve out-of-pocket costs above the Medicare rebate.
• "Private health insurance replaces Medicare." Private health insurance supplements Medicare; it does not replace it. You still pay the 2% Medicare levy regardless of whether you have private insurance. The insurance eliminates the MLS surcharge and provides access to private hospital treatment, but you retain full Medicare eligibility.
• "I earn under $93 000 so I do not need private health insurance." If your income is below the MLS threshold, there is no financial penalty for not having private insurance. However, the Lifetime Health Cover (LHC) loading adds 2% to your premiums for every year you are aged over 30 without hospital cover. Taking out insurance before 31 avoids this loading permanently, saving thousands of dollars over a lifetime. Health needs can also change unexpectedly, and holding insurance provides protection against expensive private hospital bills.
• "The Medicare levy and Medicare Levy Surcharge are the same thing." They are completely separate charges. The standard 2% Medicare levy applies to virtually all tax residents (above the shade-in threshold). The MLS is an additional charge of 1% to 1.5% that only applies to higher earners ($93 001+) who do not hold private hospital cover. Having PHI eliminates the MLS but does not reduce the standard 2% levy.

Sources

• ATO: Medicare Levy
• ATO: Medicare Levy Surcharge
• Department of Health: MLS and PHI
• ATO: Private Health Insurance Rebate