Medicare Levy: Who Pays and How Much? Complete 2025-2026 Guide

The Medicare levy is a tax that helps fund Australia's public healthcare system, providing all Australian residents with access to free or subsidised medical services. Understanding how the levy works, who needs to pay it, and whether you might be exempt is important for managing your tax obligations effectively. This comprehensive guide covers everything you need to know about the Medicare levy for the 2025-2026 financial year.

What Is the Medicare Levy?

The Medicare levy is a separate tax from income tax that funds Australia's universal healthcare system, Medicare. It ensures that all Australians have access to bulk-billed doctor visits, subsidised prescription medicines through the Pharmaceutical Benefits Scheme, and free treatment as a public patient in public hospitals.

The standard Medicare levy rate is 2% of your taxable income. This is calculated on your entire taxable income once you exceed certain thresholds, not just the income above the threshold. For example, if you earn $60,000, your Medicare levy would be $1,200 per year, or about $46.15 per fortnight.

It is important to understand that the Medicare levy is in addition to your income tax. When budgeting for your tax obligations, you need to account for both your income tax liability and your Medicare levy to get an accurate picture of your take-home pay.

Medicare Levy Thresholds for 2025-2026

Not everyone pays the full Medicare levy. The Australian Taxation Office sets income thresholds below which taxpayers receive a reduction or complete exemption from the levy. These thresholds are adjusted periodically to account for inflation and changes in living costs.

For the 2025-26 financial year, if your taxable income is below the lower threshold of approximately $26,000 for singles, you generally do not have to pay any Medicare levy. If your income is between the lower and upper thresholds (approximately $26,000 to $32,500), you pay a reduced levy calculated using a shade-in formula. Once your income exceeds the upper threshold, you pay the full 2% levy on your entire taxable income.

For families, the thresholds are higher and depend on the number of dependent children. The family threshold is approximately $43,846 plus an additional amount for each dependent child. Seniors and pensioners entitled to certain tax offsets also have higher thresholds.

Medicare Levy Exemptions

Certain categories of taxpayers are exempt from paying the Medicare levy. These exemptions typically apply to people who are not entitled to Medicare benefits or who have specific circumstances that warrant an exemption.

You may be entitled to a full exemption if you are a foreign resident for the entire financial year who is not entitled to Medicare benefits. People who hold certain temporary visas that do not grant Medicare access are also exempt. Additionally, if you are covered under a reciprocal healthcare agreement between Australia and another country and have not chosen to join Medicare, you may qualify for an exemption.

Medical exemptions are available for people who were in the defense forces or who were not entitled to Medicare benefits for a particular period. If you are exempt for only part of the year, you pay a proportionally reduced levy for the period you were liable.

The Medicare Levy Surcharge

The Medicare Levy Surcharge is different from the standard Medicare levy and applies to higher-income earners who do not have adequate private hospital insurance. It is designed to encourage people to take out private health cover and reduce the demand on the public hospital system.

The surcharge applies if your income for surcharge purposes exceeds $93,000 for singles or $186,000 for families and you do not have an appropriate level of private hospital cover. The surcharge rates are tiered based on income: 1% for incomes between $93,001 and $108,000 for singles, 1.25% for incomes between $108,001 and $144,000, and 1.5% for incomes above $144,000.

It is worth noting that the cost of private health insurance is often less than the Medicare Levy Surcharge for many people. This makes getting private cover a financially sensible option if you are in the income range where the surcharge applies. Many people find that having private health insurance also provides additional benefits such as shorter wait times for elective surgery and a choice of doctor.

How the Medicare Levy Is Collected

The Medicare levy is collected through the PAYG (Pay As You Go) withholding system for employees. Your employer calculates and withholds the appropriate amount from each pay, along with your income tax. This means you do not need to make separate payments for the levy throughout the year.

When you lodge your tax return, the ATO calculates your exact Medicare levy liability based on your annual taxable income. If too much was withheld during the year, you receive a refund. If too little was withheld (which can happen if you have multiple jobs or variable income), you will need to pay the difference.

Self-employed individuals and those with investment income may need to pay their Medicare levy as part of their quarterly PAYG instalments or as a lump sum when they lodge their tax return.

Calculating Your Medicare Levy

For most people, calculating the Medicare levy is straightforward. If you earn above the upper threshold and have no exemptions, simply multiply your taxable income by 2%. For someone earning $85,000, the Medicare levy would be $1,700.

If your income falls in the shade-in range between the lower and upper thresholds, the calculation is more complex. The formula ensures that the levy phases in gradually so you are not suddenly hit with the full 2% as soon as you exceed the lower threshold. The ATO provides worksheets and calculators to help with this calculation.

For a quick calculation that includes the Medicare levy along with your income tax, use our Australian tax calculator. It automatically determines whether you pay the full levy, a reduced levy, or no levy based on your income and residency status.

Strategies for Managing Medicare Levy Costs

While you cannot avoid the Medicare levy if you are liable for it, there are legitimate strategies to manage your overall healthcare and tax costs effectively.

If you are close to or above the surcharge thresholds, compare the cost of private hospital insurance against the surcharge. Often, a basic hospital policy costs less than the surcharge and provides valuable coverage. Many people find that the combination of private insurance and the government rebate makes private cover affordable.

Salary sacrificing into superannuation can reduce your taxable income, which in turn reduces your Medicare levy. However, be aware that certain amounts of super contributions may still count toward your income for surcharge purposes.

Conclusion

The Medicare levy is an important part of Australia's tax system that helps fund universal healthcare access for all residents. While it adds to your tax burden, the levy is relatively simple at 2% of taxable income for most people, and those on lower incomes receive reductions or exemptions.

Understanding the difference between the Medicare levy and Medicare Levy Surcharge is particularly important for higher-income earners, as taking out private health insurance can often be more cost-effective than paying the surcharge. To see exactly how the Medicare levy affects your take-home pay, try our free Australian tax calculator which includes Medicare levy calculations.