How Does Private Health Insurance Affect My Tax Return?

When it comes to health insurance and tax in Australia, there’s a lot of confusing jargon to wrap your head around. What is the Medicare Levy Surcharge and do you need to pay it? How can the health insurance rebate affect your tax refund?

This guide simplifies health insurance and tax, including how your private health cover can help you save some dollars at tax time.

How does private health insurance affect my tax bill?

 To help ease the burden on our public healthcare system, the Australian Government has several initiatives in place to encourage people to get private health cover. The three main ones are:

• The private health insurance rebate

• The Medicare Levy Surcharge (MLS)

• The Lifetime Health Cover (LHC) loading

Each of these can affect your tax bill and insurance premiums in different ways. The result is that you can end up getting a bigger tax refund by having health cover, paying more tax if you don’t, or paying higher insurance premiums the longer you wait to get health cover.

What is the private health insurance rebate?

The private health insurance rebate is essentially a partial refund or discount the government gives you on your health insurance premiums. Think of it as a reward for having private health cover. 

If you’re eligible, you can get the private health insurance rebate on hospital cover, extras cover, or both.

The rebate is income-tested, which means the amount you get back depends on how much you earn.

Rebate rates for singles for the 2023/2024 financial year:

Rebate rates for couples, families and single parent families for the 2022/2023 financial year:

Source: ATO

Find out how much your rebate would be with our health insurance rebate calculator.

How do I claim the private health insurance rebate?

 There are two ways you can get your private health insurance rebate:

• It’s paid directly to your health fund, giving you an upfront reduction to your premium payments.

• It’s paid through your tax return, as a reduction to your income tax.

If you want to claim the rebate as a reduction to your insurance premiums, you’ll need to give your health fund your estimated income so they can calculate your upfront premium reduction. Alternatively, you can claim the rebate as a refund when you lodge your tax return.

What is the Medicare Levy Surcharge (MLS)?

 The Medicare Levy Surcharge is a percentage of your income that’s payable to the ATO when you lodge your tax return. It was introduced by the Australian Government to encourage high income earners to get private health insurance.

You’ll need to pay the MLS if you don’t have private health cover and earn more than $93,000 as a single person, or $186,000 as a family (including couples and single-parent households), increasing by $1500 for each child after the first.

The rate charged is between 1% and 1.5% of your income, depending on how much you earn.

MLS income thresholds and rates for 2023-24:

Source: ATO

What’s the difference between the Medicare Levy and the Medicare Levy Surcharge (MLS)?

 The Medicare Levy Surcharge is payable by people who earn more than the MLS threshold and don’t have eligible private hospital cover. 

The Medicare Levy is payable by most Australian taxpayers, regardless of whether or not you have private health insurance. It’s 2% of your taxable income, in addition to the tax you pay on your taxable income.

You don’t have to pay the Medicare Levy if you earn less than $23,365 (or $38,365 for seniors and pensioners). 

If you’re eligible to be charged the MLS, you’ll need to pay it in addition to the Medicare Levy. This means that without private health cover, you could be paying as much as 3.5% of your income in tax every year for the combined Medicare Levy and Medicare Levy Surcharge.

What is the minimum level of health insurance required to avoid the MLS?

 To avoid paying the MLS, you’ll need health insurance that includes:

• Private patient hospital cover

• A maximum excess of $750 for singles and $1,500 for couples or families

Generally speaking, having a basic tier of private hospital cover is enough to avoid paying the MLS.

Keep in mind, though, that this level of cover might not offer all the benefits you’re looking for. That’s why it’s a good idea to compare different levels of cover from different health funds to find the one that fits your specific needs.

What is Lifetime Health Cover (LHC) loading?

Lifetime Health Cover (LHC) loading is a government initiative intended to encourage Aussies to get private hospital cover earlier in life. Although not directly related to tax, it’s an important consideration if you’re weighing up whether or not to get health insurance.

If you don't get hospital cover before 1st July following your 31st birthday, you'll pay a 2% Lifetime Health Cover 'loading' on hospital cover.

This means a 2% additional cost is added to your hospital cover premiums for every year you go without cover. 

For example, if you wait until you’re 40 to get hospital cover, you’ll be looking at paying an additional 18% on your premium.

Loading is capped at 70% and stops after 10 years of continuous hospital cover.

How to avoid Lifetime Health Cover (LHC) loading:

 You can avoid paying the LHC loading by taking out hospital cover before 1st July following your 31st birthday. 

If you're over 31, getting health insurance sooner rather than later can help you minimise the percentage of LHC loading you have to pay.

The government also allows ‘Days of Absence’, which means you can take a break from having hospital cover for a total of 1094 days, or switch policies, and still avoid the LHC loading. 

Why get health insurance before tax time?

 In short, it could help you save on your tax bill. 

If you earn more than $93,000 as a single person, or $186,000 as a family, taking out hospital cover as a minimum can help you avoid the Medicare Levy Surcharge for the period you hold that cover, as well as giving you access to the health insurance rebate.

You can compare policies side-by-side to find a level of cover that suits your needs and helps you save at tax time. Ask our Compare Club specialists today.

Chris Stanley is the sales & operations manager of health insurance at Compare Club. With extensive experience and expertise, Chris is a trusted leader known for his deep understanding of health insurance markets, policies, and coverage options. As the sales & operations manager of health insurance, Chris leads a team of dedicated professionals committed to helping individuals and families make informed decisions about their health insurance needs.

Meet our health insurance expert, Chris Stanley

Chris's top health insurance tips

• 1

  Australia’s public health system is world-class, but wait times for public hospitals can be long, inconvenient - and leave you living in constant pain while you wait.

• 2

  An appropriate private health insurance policy can speed up your surgery, relieving your pain sooner.

• 3

  Family health cover means your children are covered under the same policy as you.

• 4

  Many health insurance policies come with a 12-month waiting period for pregnancy-related cover, so it’s a good idea to get a family policy organized well before starting your family. This means your child will be covered from birth until at least their early twenties (depending on which health fund you select).