What is the health insurance tax?
Australians contribute 2% of their income to support Medicare and our public health system through the Medicare Levy tax. Many Australians are confused about why they are hit with an additional surcharge during tax time and why their accountants suggest purchasing health insurance. If you earn over the taxable income thresholds listed in this article, you must pay an additional tax for the 2024-2025 financial year called the Medicare Levy Surcharge.
You can avoid all or part of this extra tax surcharge if you hold at least an eligible private hospital cover policy during the same financial year. Every day you have private hospital cover, you avoid the Medicare Levy Surcharge for that day come tax time in 2025. The same income thresholds apply to the private health insurance government rebate, which we will also detail below.
The Medicare Levy Surcharge Explained
In private health insurance, the Government gives, and the Government takes away. On the one hand, they give us the Australian Government Rebate to contribute towards our health insurance premiums. On the other hand, they tax higher-earning Australians an additional 1 to 1.5% of their taxable income in the form of the Medicare Levy Surcharge (MLS). This is not to be mistaken with the Medicare Levy, which all Australians must pay; it supports our wonderful (albeit sometimes flawed) public health care system.
The Medicare Levy Surcharge is an additional tax on top of the Medicare Levy. It was introduced to encourage more people to take out private hospital cover if they are in an income bracket that should be able to afford it or, if not, to contribute more towards Medicare than low-income earners. The end result is less pressure on our public health system because more Australians have the option to use a private doctor and private hospital accommodation for their medical treatments.
The Income Thresholds for Medicare Levy Surcharge (2024-2025)
Use this table to first find which income tier you’re in based on your single or combined gross annual income, and then use the table at the bottom to find which surcharge you might have to pay.
Note: This pertains to your total taxable income from all sources. If you are unsure, please consult your accountant or financial adviser before purchasing any health insurance.
| Threshold | Base Tier | Tier 1 | Tier 2 | Tier 3 |
|---|---|---|---|---|
| Singles | $97,000 or less | $97,001 - $113,000 | $113,001 - $151,000 | $151,001 or more |
| Couples & Families* | $194,000 or less | $194,001 - $226,000 | $226,001 - $302,000 | $302,001 or more |
| Medicare Levy Surcharge % | ||||
| All Ages | 0.0% | 1.0% | 1.25% | 1.5% |
*The family income threshold is increased by $1,500 for each MLS dependent child after the first child.
Things You Need to Know
- The MLS can be completely or partially removed by holding eligible private hospital cover
- If you do not earn above these listed income thresholds you will not have to pay the additional surcharge and will not need to take out a private hospital cover policy for tax purposes. Despite this, many Australians who earn below these thresholds still hold a private hospital cover policy so that they can avoid public waiting lists, choose their own private doctor and opt for a private room in a private hospital for any medical, in-patient procedures.
- You may have only held private hospital cover for a portion of the financial year or perhaps it may have lapsed for a period during the year. The financial year is broken down into 365 days; for every day you held private hospital cover you will avoid the Medicare Levy Surcharge for those days.
- Your health fund will send you a tax statement at the end of the financial year to give to your accountant or to provide to the ATO. If you submit your own tax returns and are unsure about how the Medicare Levy Surcharge may have affected you this year, please seek financial advice.
*If you’re still unsure if you or your family will get hit with the Medicare Levy Surcharge in 2025, please get in touch with our private health insurance advisers and we can clear it up for you.
Portability
Don’t re-serve waiting periods when you switch to a new health fund or policy
“John was immediately covered for a hip replacement in private hospital because he had already served his waiting periods for joint replacements on his old policy”
Private Health Insurance Government Rebate
The Australian Government contributes towards your private health insurance costs, which is means-tested based on your single or household income. The rebate can be deducted from your premiums or claimed as a lump sum at tax time. Most health funds advertise their policy prices with the full rebate included, so you must ensure your AGR “Tier” is correct before applying.
How does the private health insurance government rebate work?
The Government contributes towards our private health insurance costs in the form of a rebate. Most Australians pay their health insurance premiums with the rebate already subtracted from the price. However, some people opt to pay the full unrebated amount and then claim the rebate back in full at tax time (ask your accountant for details) – either way, you end up paying the same amount for the policy. If your taxable income changes at any point, you can update your government rebate through your health insurer’s app or online portal or by calling them.
The rebate on health insurance is increased when you turn 65 and then again when you turn 70. This allows retirees and pensioners to afford top hospital cover when they need it most. The Government Rebate is also means tested, meaning that if you earn above a particular amount of taxable income in any financial year, the rebate will be reduced or unavailable to you at all.
Government Rebate Tiers
The following table describes the income threshold tiers for a Single, Couple, Single Parent and Family concerning which Government rebate you are entitled to:
| Age | Base Tier | Tier 1 | Tier 2 | Tier 3 |
|---|---|---|---|---|
| Under 65 | 24.608% | 16.405% | 8.202% | 0% |
| 65-69 | 28.710% | 20.507% | 12.303% | 0% |
| 70+ | 32.812% | 24.608% | 16.405% | 0% |
Summary
- The income thresholds described in the above table are based on your total taxable income for the current financial year. If you are unsure about what this is you may need to ask your accountant.
- If you claim the incorrect rebate on your health insurance premiums it will simply be adjusted on your tax return. For example, if you claimed a Base Tier rebate for the year and ended up earning more than expected and end up falling into Tier 1, then the difference is taken from your tax return (and vice versa).
- The income threshold for single parents and families is increased by $1,500 per child after the first child. De-Facto relationships are considered as a Couple/Family relationship in regard to the rebate.
- At the end of the financial year your private health fund will send you a letter describing your total paid premiums for the financial year including any rebated amounts. This is to be provided to your accountant. If you complete your own tax returns and are unsure about your private health insurance rebate, please seek financial advice.
