Medicare levy surcharge vs private health insurance: pay the tax or buy the cover? (FY2026-27)

The Medicare levy surcharge is the only tax you can swap for something useful.

Cross the income line without private hospital cover and you pay an extra 1% to 1.5% of your whole income — and get precisely nothing for it. Buy a compliant hospital policy and the surcharge disappears; from the middle tier up, the policy usually costs less than the tax it removes.

Here are the questions that actually decide it, answered for FY2026-27. (Returns being lodged now cover FY2025-26, where the base thresholds were $101,000 single / $202,000 family. General information only, not personal advice.)

1. Pay the surcharge or buy the cover — which costs less?

The FY2026-27 thresholds and rates, verified against the ATO:

Tier	Single income	Family income	Surcharge	What that may cost
Base	≤ $105,000	≤ $210,000	0%	nil
Tier 1	$105,001–$123,000	$210,001–$246,000	1%	~$1,050–$1,230 (single)
Tier 2	$123,001–$164,000	$246,001–$328,000	1.25%	~$1,538–$2,050
Tier 3	$164,001+	$328,001+	1.5%	$2,460 and up

Against that: the cheapest compliant Basic hospital policies currently run roughly $1,000–$1,300 a year for a single, depending on state, insurer and age. On Tier 1 and Tier 2 incomes the government also refunds part of the premium through the private health insurance rebate — 16.079% and 8.038% respectively for premiums paid from 1 July 2026 (under 65), which pulls the net cost down further. Tier 3 gets no rebate.

So the arithmetic falls out simply:

Tier 1: roughly line-ball. The tax and the cheapest cover cost similar money — but one of them covers you and stops the age-31 loading clock (question 5); the other vanishes.
Tier 2 and above: the cover is simply cheaper. At $164,001 the surcharge may be $2,460 — around double the cheapest compliant policy. At $200,000 it’s $3,000, before the policy has cost you a cent over $1,300.

One honest caveat: a floor-price Basic policy is mostly public-hospital-only cover. It removes the tax and gets you into the private system’s front hall, but if you’d actually use private treatment, budget above the floor. You’re allowed to buy it purely for the tax outcome — that is, openly, what the product is for.

2. What income actually counts for the $105,000?

Not your salary — your income for MLS purposes. The ATO adds back things people assume are invisible:

taxable income
reportable fringe benefits (novated leases, salary-packaged extras)
reportable super contributions — salary-sacrificed and personal deductible contributions
net investment losses — yes, negative gearing is added back for this test
your spouse’s income, if you have one (combined test)

The ATO’s own 2026-27 example: $90,000 of salary plus $27,000 of reportable fringe benefits = $117,000 of MLS income → Tier 1 → a $1,170 surcharge. A “$90k earner” by payslip, surcharged as a $117k one.

Two traps inside this:

You can’t salary-sacrifice your way under the line. Sacrificed super comes straight back in the test. (It may still shrink the dollar amount charged, since the surcharge itself is calculated on taxable income plus fringe benefits — but it won’t change your tier.)
It’s a cliff, not a ramp. At $105,000 you pay nothing; at $105,001 the 1% applies to your whole charge base, not the dollar over. One pay rise, bonus or capital gain can switch it on for the year.

3. Which policies actually get you out of it?

Only one kind: hospital cover with an Australian-registered health insurer, with an excess of $750 or less for singles, $1,500 or less for couples and families.

What does not work — and these catch people every year:

Extras-only cover. Dental, optical, physio — no MLS effect at all.
Overseas visitor cover (OVHC) or overseas student cover (OSHC). Even the expensive ones. They may satisfy your visa; they do not satisfy the MLS.
International or unregistered insurers.
A suspended policy. Suspend your cover to travel and every suspended day counts as uncovered.

And yes — the cheapest compliant Basic policy on the market legally removes the surcharge, exactly the same as a top policy does. The ATO tests whether you hold compliant hospital cover, not how good it is.

4. I only just crossed the line — does part of a year count?

The surcharge is counted by the day. Every day you (and your whole family, if you have one) hold compliant hospital cover is exempt; every day you don’t, isn’t.

Which produces the classic June mistake: realise in June that you’ll owe the surcharge, buy a policy — and still pay for the ~334 days you were uncovered. Wiping a full financial year takes cover from 1 July to 30 June. If your income is trending toward $105,000, the cheap move is to sort cover before the year starts, not when the tax return makes it real.

The day count works in your favour too: got cover in October? You pay the surcharge for July–September only, pro-rata.

5. The other deadline: what happens at 31?

Separate system, same decision: Lifetime Health Cover (LHC) loading. Miss the deadline of the 1 July after your 31st birthday and, whenever you finally buy hospital cover, the premium is loaded 2% for every year you’re over 30 — up to a maximum of 70%. Wait until 40 and the same policy costs you 18–20% more, every year, and the government rebate doesn’t apply to the loading component.

The saving graces, verified:

New migrants aged 31+ get 12 months from registering for interim or full Medicare to buy hospital cover with no loading. If you arrived recently, that clock is likely already running.
The loading falls away after 10 years of continuous hospital cover.
On a couples policy the loading is the average of both adults’ — a 22% partner and a 0% partner pay 11%.
Everyone gets 1,094 lifetime “days of absence” for gaps like switching insurers.

The MLS is a tax on this year. LHC is a price on every future year. For anyone around 30, the LHC clock is often the stronger reason of the two to act.

6. How do couples and families get tested?

Combined income, family thresholds: $210,000, rising $1,500 per dependent child after the first.
Everyone needs cover. You, your spouse, and dependants. One uncovered person and the surcharge applies — a covered high-earner still pays if their partner has no policy.
A low-earning spouse may be personally spared: if the family is over the threshold but your own MLS income is under about $27,000 (the FY2025-26 figure was $27,222; indexed since), you personally may not pay, though your higher-earning partner still does.
Married or separated mid-year? Counted by the day — single thresholds for your single days, family thresholds for your partnered days.
Note for the rebate (a different test): your rebate tier is set by your family status on 30 June.

The expensive version of this mistake: two $110,000 earners each under no illusion they’re “average earners”, jointly at $220,000 — over the family line, both needing cover.

7. On a temporary visa with no Medicare? You may owe neither

If you’re not entitled to Medicare — typically 482, 485 and student visa holders from countries without a reciprocal health agreement, which includes China — you may be exempt from the 2% Medicare levy and the surcharge entirely, whatever you earn.

The route: request a Medicare Entitlement Statement (MES) from Services Australia for the year, then claim exemption category 3 in your tax return. On a $100,000 income the levy alone is $2,000 a year — money many temporary residents hand over for their entire stay without ever being entitled to the system it funds. The statement is per-year, and prior years can generally be amended if you never claimed.

The fine print, hedged where it must be:

The full exemption generally requires that you had no dependants, or all your dependants were also exempt — a Medicare-entitled spouse may break it.
Citizens of reciprocal countries (the UK, NZ, Ireland and others) are entitled to Medicare, so this exemption isn’t theirs.
Once you become entitled — PR granted, or an interim card after lodging a PR application — the exemption may end from that date.
Your visa may require OVHC (condition 8501). Keep it for the visa — but it’s the MES, not the OVHC, that fixes the tax.

The three-line decision

Under the threshold and staying there? Do nothing — the MLS isn’t your problem. Watch the age-31 LHC clock instead.
Over it (or heading there) with Medicare? Price a compliant hospital policy before 1 July. From Tier 2 up it’s cheaper than the tax; at Tier 1 it’s line-ball with cover thrown in.
No Medicare entitlement? Don’t buy cover for the tax — get the MES and claim the exemption.

FY2026-27 thresholds and rates, verified against the ATO as at 28 July 2026. Premium figures are market ranges that change; your surcharge depends on your own income mix. General information only — get advice on your facts before acting.