Medicare Levy Surcharge or Hospital Cover: Which One Costs You Less at Your Income

The Medicare levy surcharge is not covered by the tax your employer withholds from your pay. The Australian Taxation Office states this plainly, and it explains why the surcharge so often arrives as a surprise: the amount is worked out when your return is processed, so it can reduce a refund you expected or create a bill you did not.

This article is written for a person whose income sits above the surcharge threshold and who holds no private hospital cover, and for a couple or family in the same position. The calculator below compares the surcharge with the cost of hospital cover at your own quote. It is a guide to the arithmetic, not tax advice, and its result applies only if the conditions set out in each section below also apply to you.

Timing matters as well. A decision about cover made before 30 June can change the surcharge for the year still running, which is one reason tax planning is better done through the year than at the deadline. A decision left until lodgement can only be paid for, and a household that relies on its refund should know that a surcharge bill may arrive in its place. That is the situation an emergency fund worked out from your own bills is meant to absorb.

What the surcharge is, and whom it covers

The Medicare levy surcharge is separate from the Medicare levy. According to the Private Health Insurance Ombudsman, which publishes the government’s consumer information at privatehealth.gov.au, the surcharge is charged at 1%, 1.25% or 1.5% depending on income, and it is paid on top of the 2% Medicare levy. A person liable for the surcharge therefore pays both.

The surcharge is tied to private hospital cover. A person above the income threshold who does not hold an appropriate level of hospital cover pays it. A person above the threshold who does hold that cover does not. Below the threshold, the surcharge does not apply, whether or not the person is insured.

The condition to check first concerns who must be covered. The test applies to you, your spouse and your dependent children together, and the ATO and the Ombudsman both state that all of them must hold appropriate hospital cover for you to avoid the surcharge. A policy that covers one partner, or a parent but not the children, can leave the household liable even while a premium is being paid each month.

The thresholds for 2025-26 and 2026-27

Two income years are live in October 2026, and each serves a different purpose. The 2025-26 year is the one most people are lodging a return for now. The surcharge on that year is already fixed by the cover a person did or did not hold, and cover cannot be bought backwards to change it. The 2026-27 year began on 1 July 2026 and is still running, so it is the year in which a decision about cover can still make a difference.

The practical consequence is that a reader needs both tables for different jobs. The 2025-26 table tells you what to expect when the return now being prepared is assessed. The 2026-27 table is the one to use when weighing a quote, because only that year can still be influenced by cover taken out now.

The figures below are the ATO’s, from its page on surcharge income, thresholds and rates, published on 27 August 2026. The Ombudsman’s site carries the same figures for both years.

2025-26 income year

2026-27 income year

Three conditions sit beneath these tables. First, the family thresholds rise by $1,500 for each dependent child after the first, and the Ombudsman states the increase against the thresholds generally, so every family boundary moves, not only the first. Second, single parents and couples are both tested against the family tiers. Third, a dependent child has a defined meaning: the ATO counts a child under 21, or a child aged 21 to 24 who is studying full time.

A family with one dependent child therefore uses the family figures exactly as tabled. The calculator applies the increase once the number of children is entered.

Income for surcharge purposes is not taxable income

The income tested against these thresholds is called income for Medicare levy surcharge purposes, and the ATO distinguishes it carefully from taxable income. For many people the two figures are close. For people with salary packaging, investment losses or certain superannuation contributions, they can be some distance apart, and it is the surcharge figure, not taxable income, that decides the tier.

The ATO lists the components. Income for surcharge purposes is the total of your taxable income, your reportable fringe benefits, your total net investment losses and your reportable superannuation contributions. For a couple, the test uses the combined figure, so your spouse’s income for surcharge purposes is included as well. Where income arrives from several places, it is worth reading how income from more than one source is treated at tax time alongside this list, because each source can add to the total.

A second distinction follows. The tier is decided by income for surcharge purposes, but the rate is not charged on that whole figure. The ATO states that the surcharge is levied on taxable income, reportable fringe benefits and any amount subject to family trust distribution tax. Net investment losses and super contributions can therefore move a person into a tier without themselves attracting the charge.

The ATO works through an example for 2026-27, and it shows both rules at once. Tom has taxable income of $90,000 and reportable fringe benefits of $27,000, so his income for surcharge purposes is $117,000. As a single person in 2026-27, that places him in Tier 1, where the rate is 1%. If he holds no appropriate hospital cover for the year, his surcharge is $1,170.

This is why readers who salary package should look closely at their income statement. Packaged benefits that are reportable count towards the threshold, and they also form part of the amount on which the rate is charged. An arrangement that lowers taxable income can still leave income for surcharge purposes higher than a person expects. The calculator asks for reportable fringe benefits separately for that reason.

The same applies within a couple. Because the family test uses combined income, a partner’s packaged benefits, investment losses or reportable super contributions count towards the household figure in the same way as your own. Each partner should therefore check their own income statement before the combined figure is entered.

What counts as hospital cover

Holding a policy is not, by itself, enough. The ATO describes the cover required as an appropriate level of private patient hospital cover, and its page on the subject, updated on 30 April 2026, sets out the conditions. The policy must be hospital cover held with a registered Australian health insurer, and its excess must not exceed $750 for a single policy or $1,500 for a couple or family policy. A hospital policy with a higher excess does not stop the surcharge.

Some cover does not count at all. The ATO and the Ombudsman both exclude extras cover, travel insurance and cover held with an overseas fund. A person with a generous extras policy and no hospital cover remains liable, and so does a person relying on an overseas policy.

Before comparing prices, then, the first check is the excess on the quote. The calculator repeats the limits beside the premium field, so that the comparison is made only against policies that would in fact remove the surcharge.

The comparison, set out honestly

The two options are not equivalent, and the comparison should begin by saying so. The surcharge buys nothing: it is a charge on the tax return, and paying it provides no hospital cover. A premium buys cover, but it may cost more or less than the surcharge, depending on income and on the policy chosen. Neither outcome can be assumed, which is why the calculator asks for your own quote rather than an average.

The government rebate on private health insurance moves the arithmetic in one particular direction. The Ombudsman publishes the rebate by income tier, and for the period from 1 July 2026 to 31 March 2027, for people under 65, the rates are 24.118% in the base tier, 16.079% in Tier 1, 8.038% in Tier 2 and 0% in Tier 3. The rebate falls as income rises. The people who pay the surcharge are therefore the same people who receive the smallest rebate, or none, when they buy cover.

Older age bands receive higher rates, and the calculator includes them, applied as the insurer applies them to the oldest person on the policy. The rates from 1 April 2027 have not yet been published. The calculator uses the published rates for the whole of 2026-27, so its result for the final three months of the year should be read as an approximation.

For 2026-27, the calculator places your income in its tier and works out the surcharge for a full year without cover. It takes your quoted premium before the rebate and any loading, applies the rebate for your tier and age band, adds any loading, and reports the difference. For 2025-26 it reports the surcharge alone, because that year can no longer be changed.

The result should be read with its conditions attached. Where cover costs less than the surcharge, the comparison favours cover on cost alone, provided the policy meets the excess limits and covers everyone the test requires. Where cover costs more, the difference is the price of the cover itself, measured against a charge that provides nothing in return. Whether that price is worth paying depends on what the policy would be used for, and that is a judgement the calculator does not attempt to make.

Lifetime Health Cover loading

The Lifetime Health Cover loading belongs in the comparison as well, because it is added to the premium a late joiner pays. According to the Ombudsman, a person who takes out hospital cover after their base day pays a loading of 2% on the premium for every year they were over 30 at the 1 July before they joined. The loading is capped at 70%, and it is removed once the person has held hospital cover for 10 continuous years.

The base day is usually the 1 July after a person’s 31st birthday. The rules also allow 1,094 permitted days without hospital cover, and anyone with a gap in their cover history should read the Ombudsman’s explanation of those days before assuming a loading applies.

For couples, the loading is averaged across the policy. The Ombudsman’s example concerns Noor and Lukas: Noor carries no loading, Lukas carries 22%, and their joint policy carries 11%. The calculator follows the same method, and an age left blank counts as no loading.

One further condition matters here. The Ombudsman states that the rebate does not apply to the loading. The calculator therefore applies the rebate to the base premium only and adds the loading in full.

The loading also changes the time frame of the decision. The surcharge is assessed one income year at a time, whereas a loading, once it applies, remains on the premium until 10 continuous years of cover have passed. A comparison made for a single year shows only the first of those years, and a reader who carries a loading should keep that longer period in mind when reading the calculator’s result.

Part of a year, suspended policies and a new spouse

The surcharge is not all or nothing. The Ombudsman states that it applies for the days on which you did not hold appropriate hospital cover. A person who takes out cover partway through 2026-27 is liable only for the days before the policy began, provided the other conditions are met. The calculator shows an approximate daily figure beside the full-year one so that a part year can be estimated. That daily figure is a guide to the cost of each further day without cover, not a final assessment, because the ATO calculates the surcharge from the return itself.

A suspended policy is treated differently. The Ombudsman states that a suspended policy does not provide an exemption from the surcharge, so the days of a suspension should be treated as days without cover.

Couples have one further rule. For 2025-26, the ATO states that a person in a couple does not pay the surcharge if their own income for surcharge purposes was $27,222 or less. The equivalent figure for 2026-27 did not appear on the ATO pages read for this article, so it is not stated here. The calculator asks a person with a low income to check the ATO’s spouse rule for the current year.

Circumstances also change within a year. A change in income, a new spouse or a change in dependants can each change whether the surcharge applies, and at which tier. The calculator tests one set of figures for a whole year and cannot account for these changes.

Before you sign a policy, or skip one

The ATO and the Ombudsman publish what is needed to make this decision on the right figures. The checks, in order, are these.

• Run the calculator for 2026-27 with all of your income items, including reportable fringe benefits, and with a real quote rather than an estimate.
• Confirm that the excess on the quote is no more than $750 for a single policy or $1,500 for a couple or family policy. A higher excess will not stop the surcharge.
• Confirm that everyone the test covers, including your spouse and dependent children, would be on the policy.
• Establish whether a Lifetime Health Cover loading applies, and include it, because the rebate will not reduce it.
• For 2025-26, treat the calculator’s figure as the amount to expect on your return, and plan for that amount rather than for a refund.

The calculator is your own arithmetic using published figures. It is not advice, and it leaves out family trust distribution amounts and changes partway through a year. For a final figure, use the ATO’s own estimator or engage a registered tax agent, who can apply the rules to your whole return. Testing income, cover and dependants together is part of what you are really paying a tax agent for.

A reader who completes these checks will know whether cover costs more or less than the surcharge at their income, which is the question this article set out to answer.

Sources: Medicare levy surcharge income, thresholds and rates, Australian Taxation Office (https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/medicare-levy-surcharge/medicare-levy-surcharge-income-thresholds-and-rates); Medicare Levy Surcharge, privatehealth.gov.au, Private Health Insurance Ombudsman (https://www.privatehealth.gov.au/health_insurance/surcharges_incentives/medicare_levy.htm); Lifetime Health Cover, privatehealth.gov.au, Private Health Insurance Ombudsman (https://www.privatehealth.gov.au/health_insurance/surcharges_incentives/lifetime_health_cover.htm)