Every tax return, almost every Australian pays it: an extra line on the bill, separate from income tax, worth a flat 2% of taxable income. And almost every year, thousands of people misunderstand it — mixing it up with the surcharge, assuming it suddenly switches on at some magic income number, or paying it when they were exempt all along.
Here’s the short answer: the Medicare levy is 2% of your taxable income that helps fund Australia’s public health system. In 2026-27, you pay nothing if you’re a single earner on $28,011 or less, a reduced amount between $28,011 and $35,013, and the full 2% above that. Couples, families with children, and seniors on the pensioners’ offset get substantially higher thresholds — and a handful of people, like foreign residents for tax purposes, are exempt entirely.
This guide covers exactly how the 2% is calculated in 2026-27, the full threshold tables, the phase-out band that means there’s no income “cliff”, three worked examples, who qualifies for an exemption, and the five mistakes that cost people money. If you’re the high earner wondering about the extra surcharge, that’s a different charge — see our Medicare levy surcharge guide.
How the 2% levy actually works
The Medicare levy isn’t part of the income tax brackets. Think of it as a separate layer: the ATO first calculates your income tax on your taxable income using the 2026-27 income tax rates, then adds the Medicare levy on top. On $100,000 of taxable income, that’s $2,000 of levy on top of roughly $24,538 of income tax (using 2026-27 rates) — real money, but calculated mechanically by the ATO when you lodge.
Three things about the mechanics matter more than people realise:
- It’s on taxable income, not salary. Deductions reduce the base. If your salary is $60,000 but work deductions bring your taxable income to $54,000, the levy is 2% of $54,000 ($1,080), not $1,200. This is one reason a good deductions checklist pays for itself.
- Your employer already withholds it. PAYG withholding rates bake the levy into what comes out of each pay, so for most employees the levy at tax time is a reconciliation, not a new bill.
- It shows as its own line. On your notice of assessment you’ll see “Medicare levy” listed separately from “tax payable” — which is why people on low incomes sometimes see a levy line of $0 or a reduced figure and wonder what happened.
The levy also catches more than wages. If you run a business, the levy applies to your net business income through your return. If you’re a beneficiary of a trust, your share of net trust income lands in your taxable income and the levy applies to it. For residents, even foreign-sourced income is included — the levy follows taxable income, not where it was earned.
The 2026-27 thresholds: who pays nothing, who pays less
The thresholds below were lifted in the May 2026 Budget (up 2.9%, effective 1 July 2025) and are the figures the ATO applies for the 2026-27 income year. Below the lower threshold: zero levy. Between the two: a reduced, sliding-scale amount. Above the upper: the full 2%.
| Category | No levy below | Reduced levy between | Full 2% above |
|---|---|---|---|
| Singles | $28,011 | $28,011 – $35,013 | $35,013 |
| Single seniors/pensioners (entitled to SAPTO) | $44,268 | $44,268 – $55,335 | $55,335 |
| Families (couple or sole parent) | $47,238 | $47,238 – $59,047 | $59,047 |
| Family seniors/pensioners (entitled to SAPTO) | $61,623 | $61,623 – $77,028 | $77,028 |
For families, each dependent child or student lifts the thresholds: add $4,338 to the lower threshold and $5,423 to the upper threshold per child. A couple with two children pays no levy on combined family income up to $55,914 ($47,238 + 2 × $4,338).
A crucial detail on the seniors’ rows: the test is entitlement to at least $1 of the seniors and pensioners tax offset (SAPTO) — it’s not just being over a certain age. And it cuts out entirely: for singles, SAPTO entitlement ends when rebate income reaches $52,759, so near the top of the seniors’ band the ordinary thresholds take over again.
The phase-out: why there’s no cliff
The single biggest misconception about the Medicare levy is that it “switches on” at some income and suddenly costs 2% of everything. It doesn’t. Inside the band between the lower and upper thresholds, you pay 10 cents for every dollar above the lower threshold — the ATO’s shade-in rate. The formula is simply:
Reduced levy = 10% × (taxable income − lower threshold)
That’s why the upper threshold always sits at exactly 1.25 times the lower one ($35,013 = 1.25 × $28,011): at that point the 10% phase-in meets the full 2%, and they join seamlessly. The ATO’s own worked example — on $29,000 of taxable income the levy is 10% of the $989 above the $28,011 threshold, which is $98.90, not $580 — is straight from the ATO’s Medicare levy reduction instructions.
So a single earner on $30,000 pays $198.90 (10% × $1,989), someone on $34,000 pays $598.90, and at $35,013 the phase-in hands over to the full 2% ($700.20 vs $700.26 — effectively identical). There is no income where earning one more dollar suddenly costs you hundreds. If you’ve ever held back from a pay rise or overtime because you feared “crossing a threshold”, this is the section to re-read.
Worked example 1: a single earner just over the line
Meet Jayden. He’s 24, works part-time while studying, and his taxable income for 2026-27 is $31,500 after deductions. That’s inside the single band ($28,011 – $35,013), so the 10% shade-in applies:
- Excess over threshold: $31,500 − $28,011 = $3,489
- Medicare levy: 10% × $3,489 = $348.90
Had the full 2% applied from the first dollar over the threshold, Jayden would owe $630. The phase-out saves him $281.10 — and it’s why turning down extra work to “stay under the threshold” is almost always a bad trade: every extra dollar earned still leaves you better off.
One more check for Jayden: he had no spouse and no children, so the family test doesn’t apply. The ATO will work this out automatically from his return — but now he understands the number when it appears.
Worked example 2: a family with children
Priya and Daniel have two kids (both under 21, no income). Priya’s taxable income is $40,000, Daniel’s is $12,000 from part-time work. Combined family income: $52,000. Their family threshold:
- Base family threshold: $47,238
- Plus two children: 2 × $4,338 = $8,676
- Family lower threshold: $55,914
Their combined $52,000 sits under $55,914 — so neither pays any Medicare levy. This is the family rule most people miss: the family income test overrides the individual test, so even though Priya’s $40,000 alone would attract the full 2% ($800), the combined figure switches the levy off for both of them. Couples with one higher earner and one low earner should never estimate the levy partner-by-partner.
If their combined income had landed in the family shade-in band — say $62,000, between $55,914 and the upper threshold of $69,893 ($59,047 + 2 × $5,423) — the ATO would work out a family reduction on top of any individual reduction, driven by 10% of the excess over the family threshold.
Worked example 3: a higher earner — and the surcharge cross-over
Marcus earns $150,000 in 2026-27 and has no private hospital cover. His position:
- Medicare levy: 2% × $150,000 = $3,000 — unavoidable, insurance or not.
- Medicare levy surcharge: at $150,000 for surcharge purposes, he’s in Tier 2 (singles $123,001 – $164,000 in 2026-27), so 1.25% × $150,000 = $1,875.
- Total Medicare-related charges: $4,875.
Confusing the two is the single most common Medicare tax mistake: the levy is the unavoidable part of health funding almost everyone pays, while the surcharge is the extra tax that only nudges higher earners into hospital cover — and that one disappears the moment Marcus holds an appropriate policy. We cover the surcharge tiers, part-year cover, and whether a policy actually saves you money in our Medicare levy surcharge guide.
Who doesn’t pay it at all: exemptions
Exemptions come in three ATO categories, claimed through the Medicare levy questions (M1) in your tax return:
- Category 1 — not entitled to Medicare benefits. This is the big one for temporary visa holders. If Services Australia confirms you weren’t eligible for Medicare for all or part of the year, you can claim an exemption for those days. You need a Medicare Entitlement Statement (MES) — applied for from 1 July each year for the year just ended, ideally via myGov, and you need a fresh one every year you claim. People from the 11 reciprocal health care agreement countries (the UK, New Zealand, Ireland, Italy, Sweden and others) need to check carefully: reciprocal access is limited, not full Medicare. And a common gotcha — if your dependant was entitled to Medicare while you weren’t, you may only get a half exemption for that period. Details: Services Australia’s Medicare Entitlement Statement page.
- Category 2 — foreign residents for tax purposes, and Norfolk Island residents. If you were a foreign resident for tax purposes for the full year, you can claim a full 365-day exemption. Tax residency and visa status are different tests — someone can be a tax resident while still holding a temporary visa, and in that case the levy applies.
- Category 3 — specific medical exemptions. A narrow category covering people whose medical circumstances qualify them for an exemption certificate. If you think this is you, check the ATO’s criteria directly — it’s not something to self-assess casually.
One downstream bonus worth knowing: if you’re exempt from the Medicare levy, you’re also exempt from the Medicare levy surcharge. The reverse isn’t true — the surcharge has its own separate tests.
How it shows up on your return and assessment
In myTax, the levy lives under Medicare levy reduction or exemption (M1). You don’t calculate anything — you answer the questions about your spouse, dependants and any exemption days, and the ATO works out the reduction or exemption for you. The surcharge sits at M2. If you did nothing special all year, M1 is simply “no” to everything and the full 2% is calculated.
On your notice of assessment, the levy appears as a separate line added to your income tax. For most employees it’s already been withheld across the year, so the assessment just confirms the arithmetic. Surprises arrive when something changes mid-year — a pay rise pushing you through the band, a new spouse, a child turning 21, or a visa change — and the withheld amount no longer matches reality.
Five mistakes people keep making
1. Believing private health insurance avoids the levy. It doesn’t. Extras cover, hospital cover, the lot — none of it reduces the 2%. Insurance only affects the surcharge. Paying for a policy to “avoid the Medicare levy” is paying for nothing.
2. Treating the threshold as a cliff. As the worked examples show, earning $1,000 more over the threshold costs at most $100 in extra levy. Never turn down income over this.
3. Using gross salary instead of taxable income. Salary sacrifice into super, work deductions, and other adjustments shrink the base the levy is calculated on. Estimate your position with our income tax calculator using taxable income, not the number on your contract.
4. Forgetting the MES is annual. Services Australia won’t carry your Medicare Entitlement Statement forward — you need a new one every year you claim the exemption, applied for after 1 July. Processing can take weeks in the July–November rush, so don’t leave it until lodgement day.
5. Missing the two-year amendment window. If you paid the levy for a year you were actually exempt — common for new arrivals who didn’t know about the MES — you can generally amend your return within two years of the notice of assessment. At $85,000 of income, two wrong years is around $3,400 left on the table.
How to legitimately pay less of it
You can’t dodge the levy, but you can shrink the base it applies to. Salary sacrifice into super reduces your taxable income dollar-for-dollar (and the levy with it) — a $10,000 sacrifice on $100,000 saves $200 of levy on top of the income tax saving, and every legitimate work deduction does the same. For seniors, check your SAPTO entitlement before assuming the standard thresholds — the gap between the $28,011 and $44,268 lower thresholds is $16,257 of income taxed at 0% levy instead of the phase-in.
Frequently asked questions
I’m under the threshold — do I pay anything at all?
No. At or below $28,011 of taxable income (singles, 2026-27) the levy is zero — not reduced, zero. Between $28,011 and $35,013 you pay the reduced 10% phase-in amount, and only above $35,013 does the full 2% apply.
Is it 2% of my whole income, or just the amount over the threshold?
Once you’re above the upper threshold, it’s 2% of your whole taxable income. In the band between the thresholds, it’s 10% of just the amount over the lower threshold. Below the lower threshold, nothing.
Does the levy apply to my foreign income?
If you’re an Australian resident for tax purposes, yes — the levy is calculated on your total taxable income, including foreign-sourced income (with foreign income tax offsets applying separately where relevant). If you’re a foreign resident for tax purposes, you’re exempt from the levy entirely.
I’m self-employed. Is the levy different for me?
The rate and thresholds are identical. The difference is cash flow: employees have it withheld each pay, while sole traders settle it with their return — and may need PAYG instalments through the year so it doesn’t arrive as one lump sum. It’s the same 2% on your net business income.
Does the levy apply to trust distributions?
Effectively, yes. A trust’s income flows through to beneficiaries, and your share lands in your taxable income — where the levy treats it like any other income. Trustees assessed on behalf of beneficiaries are also liable under the Medicare levy rules.
Can the ATO really work out my reduction automatically?
Yes — answer the M1 questions honestly (spouse, dependants, exemption days) and the ATO calculates any reduction or exemption for you. But the ATO only knows what your return tells it: a missed MES, an unclaimed dependant, or a wrong spouse income figure is your mistake to catch.
The bottom line
The Medicare levy is the least avoidable line on the Australian tax return — 2% of taxable income, no insurance trick, no loophole. But “least avoidable” isn’t “most expensive”: the phase-in band means low earners pay cents, not cliffs; the family test quietly wipes the levy for thousands of couples who’d assume they owe it; and genuine exemptions — foreign residents, Norfolk Islanders, the Medicare-ineligible with a current MES — are worth real money if claimed. Know your threshold, know your category, and if your income is heading for the surcharge tiers instead, read our Medicare levy surcharge guide before July.
