Pay rises push more Australian earners into insurance-linked tax risk

Income threshold changes are prompting earlier policy decisions before the new financial year begins.

Nearly a third of Australians who received a pay rise in the past 12 months were pushed above the Medicare Levy Surcharge (MLS) income threshold, forcing them to take out eligible private hospital insurance before 1 July to avoid additional tax charges in the next financial year.

The MLS threshold is currently set at $72,721 (A$101,001) for singles and $145,441 (A$202,001) for couples and families.

Research commissioned by Money.com.au further found that individuals who exceed the threshold and do not hold eligible private hospital cover for the full financial year may face an additional tax charge of between 1% and 1.5% on part of their income, on top of the standard 2% Medicare Levy.

The minimum surcharge is $727 (A$1,010) for singles and $1,454 (A$2,020) for couples and families.

Chris Whitelaw, general manager of health insurance at Money.com.au, said consumers whose incomes have recently crossed the threshold should compare the cost of private hospital cover with the potential surcharge.

According to the report, some basic hospital insurance policies start at around $720 (A$1,000) a year for singles, which may be lower than the surcharge payable by some higher-income earners without cover.

Whitelaw noted that entry-level policies often provide limited benefits and said consumers may wish to consider broader coverage options that include access to services such as dental, optical and physiotherapy.

To qualify for an MLS exemption, consumers must hold eligible private hospital cover with a registered health fund for the full financial year. Extras-only and ambulance-only policies do not qualify.

The MLS income thresholds are set to increase from 1 July 2026 to $75,601 (A$105,001) for singles and $151,201 (A$210,001) for couples.

The research also found that younger Australians are more likely to be affected by threshold creep.

Nearly half of Millennials (49%) and 39% of Gen Z respondents said a pay rise had pushed them above the MLS threshold in the past year, compared with 27% of Gen X and 7% of Baby Boomers.

($1.00 = A$1.40)