Private health tax hit: why you should crunch your own numbers

Ditching private health insurance may seem tempting as the cost of living surges, but beware of the potential tax penalty.

April 1 is not a day for jokes when it comes to private health insurance premiums, which usually rise on this day every year.

While 2022 is different, as many funds have delayed their rises because of Covid, private health tax penalties remain.

And it’s worth crunching your own numbers to work out if not having health cover is costing you more money.

The Medicare Levy surcharge taxes people who earn above-average incomes but don’t have private hospital cover. It starts at 1 per cent for singles with taxable incomes above $90,000 and couples on more than $180,000.

Hospital cover can protect people from a painful tax penalty. Picture: iStock

Sort My Money founder David Rankin says more health fund members are taking out hospital cover simply to avoid the surcharge.

“It’s a trend,” he says.

“Go back five years and people were open to health insurance for the benefit of health insurance. Now people are taking out health insurance to avoid higher taxes.”

Basic hospital cover typically cost around $1250 a year for a single and more than twice that for a couple or family.

So a single earning $100,000 a year will pay $1000 extra tax without hospital cover or $1250 for insurance and avoid the tax, while people earning more are slugged more.

Comparison website iSelect’s spokeswoman, Sophie Ryan, says the surcharge rises to 1.25 per cent for singles earning more than $105,000 and 1.5 per cent for incomes above $140,000.

“Couples and families with a combined taxable income of over $180,000 pay an additional 1 per cent levy, which increases to 1.25 per cent for those with an income over $210,000, and 1.5 per cent if they have a combined earnings of over $280,000 and don’t hold an appropriate level of hospital cover,” Ryan says.

“Some higher-income earners may be able to find private hospital cover for a similar price to the additional tax they may be required to pay via the MLS.

iSelect’s Sophie Ryan says weigh up the cost of not having insurance. Picture: Supplied

“Consider the difference in cost between the additional tax and a level of hospital cover which may provide you with some benefit in the future.”

Ryan says people should also consider the impact of the Lifetime Health Cover loading, which adds 2 per cent a year to policy costs for people who don’t have eligible hospital cover after their 31st birthday. The loading lasts for 10 years and “the maximum loading is 70 per cent”, she says.

Health insurance loadings and surcharges are not affected by extras cover, so that remains a personal choice.

Rankin says if you decide have extras, tailor the policy to yourself.

“Some are really good on dental, while some are really good for chiro – you need to make sure the policy is right for you,” he says.

Originally published as Private health tax hit: why you should crunch your own numbers