Thousands with private health insurance could still be hit with extra tax: are you one of them?
Key takeaways
- If you have extras-only private health insurance, you can still be charged the Medicare Levy Surcharge (MLS) of up to 1.5% of your taxable income.
- Extras cover pays toward services like dental, optical and physiotherapy, but doesn't exempt you from the MLS.
- Only eligible private hospital cover counts towards avoiding the surcharge; many get caught out at tax time assuming all private health insurance is treated equally by the ATO.
Many Australians assume that having private health insurance is enough to avoid paying the Medicare Levy Surcharge (MLS).
It's a costly mistake – and every year, people are caught out by it.
They buy a policy that covers extras like dental, optical and physiotherapy, only to discover at tax time that they still owe hundreds or even thousands of dollars in extra tax.
The $1,000+ misunderstanding
Extras-only health insurance is popular because it helps cover everyday healthcare costs like dental check-ups, new glasses, remedial massages and visits to the physio.
But while these policies can provide good value, they don't count for MLS purposes.
That means if your income is above the MLS threshold and you only have extras cover, the ATO still considers you uninsured for tax purposes.
Many people don't realise this until they lodge their tax return.
The private health insurance tax trap that cost one family $1,600
Why people get caught out
It's an easy mistake to make.
Someone with extras cover may naturally answer "yes" when asked whether they have private health insurance while completing their tax return.
However, the ATO distinguishes between extras cover and eligible private hospital cover.
Only hospital cover that meets the government's requirements for hospital cover exempts you from paying the Medicare Levy Surcharge.
What is the Medicare Levy Surcharge?
The MLS is an additional tax paid by higher-income Australians who don't have eligible private hospital insurance.
Depending on your income, the surcharge ranges from 1% to 1.5% of your taxable income.
For someone earning $120,000 a year, that could mean an extra tax bill of around $1,200 simply because they only held extras cover.
Medicare Levy Surcharge income thresholds (2025/26 financial year)
| % | 2025/26 thresholds | 2026/27 thresholds | ||
|---|---|---|---|---|
| Single | Families | Single | Families | |
| 0% | $0 - $101,000 | $0 - $202,000 | $0 - $105,000 | $0 - $210,000 |
| 1% | $101,001 - $118,000 | $202,001 - $236,000 | $105,001 - $123,000 | $210,001 - $246,000 |
| 1.25% | $118,001 - $158,000 | $236,001 - $316,000 | $123,001 - $164,000 | $246,001 - $328,000 |
| 1.50% | $158,001+ | $316,001+ | $164,001+ | $328,001+ |
Note that the family income threshold is increased by $1,500 for each MLS dependent child after the first child. These thresholds will increase annually in line with CPI.
How to avoid a nasty tax surprise
Check what type of health insurance you actually have.
If your policy only includes extras benefits such as dental, optical or physiotherapy, it won't exempt you from the Medicare Levy Surcharge.
Unfortunately, you can't retroactively take out hospital cover today to avoid the surcharge for the current financial year, because you must hold appropriate private patient hospital policy for the entire financial year.
If you purchase cover today, you will only be exempt from MLS from today onwards, meaning you'll still have to pay the surcharge for the majority of the year you were uninsured.
But taking out a policy today allows you to avoid the MLS for the upcoming financial year.
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