There are two very similarly named taxes that can affect how much you pay the tax man each year. The first is the Medicare Levy and the second is the Medicare Levy Surcharge.
The Medicare Levy Surcharge
The Medicare Levy Surcharge (MLS) is a Federal Government tax that helps pay for the public health system. Australian citizens all benefit from Medicare, which ensures that doctors, hospitals and emergency rooms are available to all Australians, not just those who can afford to pay.
However, hospitals, doctors, nurses and medical equipment are incredibly expensive. The bill costs the government billions of dollars every year. With our population ageing, more people will start to need more medical services, and the bill is only going to grow. Someone has to pay for healthcare, and it will be all of us!
The goal of the Medicare Levy Surcharge is to help pay for the public health system and to encourage people to take out private health cover, which may reduce the pressure on public-paid medical services. Here’s how that actually happens.
Who Pays the Medicare Levy Surcharge?
The Medicare Levy Surcharge (MLS) is designed to encourage more Australians to take out private health insurance. By doing this, the private health insurers, not the public health system, pay for the costs of medical care if the need arises.
But not everyone has to pay it. The Medicare Levy Surcharge is only paid by single people who earn over $90,000 a year, or couples and families earning more than a combined $180,000 a year. If you earn under that, then you’re not subject to the MLS.
How is the Medicare Levy Surcharge Calculated?
The Medicare Levy Surcharge is calculated as a simple percentage of your annual income. (Technically, it’s your “annual adjusted income” but we don’t need to go into that here.)
For individuals, it kicks in at $90,000 at 1% and then rises to 1.25% if you earn between $105,001 and $140,000. If you earn above $140,001, your MLS rate is 1.5%.
Avoiding the Medicare Levy Surcharge
If you earn more than $90,000 as an individual or more than $180,000 as a couple or family there is a very simple way to avoid the surcharge: take out private hospital cover. It’s that simple. When you do that, you get a code from the private health fund to put into your tax return to ensure you won’t be slugged with the Surcharge.
Deciding if private health cover is the best decision for you can be complicated. You can read more here about deciding on private health cover.
For individuals, very basic private hospital cover can cost between $80 and $110 a month, depending on the provider. For couples and families, a general rule of thumb is that cover is between 2X and 2.5X more than it is for individuals.
Private Health Insurance for individuals can cost anywhere from $960 to $1,320 per year for most of the common policies. If you earn $100,000, then your Medicare Levy Surcharge payable will work out to $1,000. So you can see how it’s not hard to wind up ahead on money, by paying for health cover and then escaping the Medicare Levy Surcharge. However, some people choose more expensive plans so teh decision can get more complicated.
A family earning $200,000 would pay $2,000 in Medicare Levy Surcharge. Cover for families is much more variable in cost than for individuals, but some policies for families cost under $2,000. In that case, looking closely at private health insurance could be a financially sensible decision when compared to paying a high Medicare Levy Surcharge.
The private health cover decision is also about how much YOU value the higher level of access and services that can be included, especially in higher-level (i.e. ‘higher cost’) health cover plans.
Each of us needs to figure out, how much will I save on the Medicare Levy Surcharge? And if the health plan still costs me extra, is it worth it to me for access to private hospitals or dental or optical, etc.?
The Medicare Levy
The Medicare Levy is one basic way that most working Australians contribute toward the cost of Medicare.
There are a lot more people who pay the Medicare Levy compared to the Medicare Levy Surcharge. However, there is still an exemption for low income earners.
Who Pays the Medicare Levy?
If you earn more than $27,069 in the most recent tax year, you will pay the Medicare Levy at a simple 2% of your taxable income. This means that people who earn more will pay more money to the Medicare Levy, as part of their income taxes.
Using some very simple numbers:
- A part-time or casual employee who earned $20,000 pays zero Medicare Levy.
- An employee earning $50,000 in the last tax year pays $1,000.
- An employee earning $100,000 pays $2,000 in Medicare Levy.
These amounts are all in addition to your regular income taxes.
Avoiding the Medicare Levy
Unlike the Medicare Levy Surcharge, there is no way to avoid the Medicare Levy unless you earn less than $27,069 for the last tax year. If you earn between $21,655 and $27,068, then you qualify for a reduced rate that’s lower than 2%.
Almost everyone who works full time pays the Medicare Levy of 2% if they earn more than $27,069. Only people who earn over $90,000 (singles) or $180,000 (couples) pay the Medicare Levy Surcharge IF they don’t have private health cover. If you don’t have private health cover and earn more than those amounts, then you pay both the Levy and the Surcharge.