Everything you need to know about saving money on your tax bill

Thousands of Australians are stung thousands of dollars in extra taxes - here’s how to check if you’re being hit, and make sure you keep more of your money.

In today’s environment, with high cost of living, rents way up, and sky high interest rates, every dollar counts.

Many people are struggling to keep up with their day-to-day expenses, not to mention actually finding some money to get ahead for the future; so if you want to buck this trend you have to be smart.

The reality is that for most people there are opportunities to save more money without just sacrificing more or saving harder.

Probably the biggest opportunity here is around being smarter with your tax and using the tax rules to your advantage.

One strategy that catches many people out is the extra tax that’s charged if you don’t have private health insurance, referred to as the Medicare levy surcharge.

Basically, if you earn above a certain amount and don’t have private health insurance hospital cover, you pay an extra tax of up to 1.5 per cent of your income.

If you earn above a certain amount and don’t have private health insurance hospital cover, you pay an extra tax of up to 1.5 per cent of your income. Picture: iStock

This tax can be more than the cost of getting health insurance, so if you earn above the threshold you can effectively get health insurance for free and save tax at the same time.

The tax rules can be a little complicated and confusing, and if you don’t understand these rules and how to get them working for you instead of against you, you can end up paying more than your fair share.

For example, paying just 1 per cent more tax on a $100,000 income means you’re paying an extra $1000 in tax each year, which is completely avoidable.

But doesn’t everyone pay the Medicare levy?

One thing that confuses a lot of people is the fact the ‘Medicare levy surcharge’ is different and separate from the standard ‘Medicare levy’.

Everyone who earns more than $24,276, and $40,939 for couples and families, will pay the Medicare levy of 2 per cent.

This is charged regardless of whether or not you have private health insurance, and you can’t avoid or manage this tax through any other strategies.

The Medicare levy surcharge is a tax that only applies to people that don’t have private health insurance for hospital cover and earn above a certain amount. Picture: iStock

What is the Medicare levy surcharge?

The Medicare levy surcharge is a tax that only applies to people who meet two criteria - earning above a certain amount, and not having private health insurance for hospital cover.

The income threshold is $97,000 for an individual, and $194,000 for a couple.

If you earn above this threshold and don’t have hospital cover, you get slugged with an additional 1 per cent income tax.

And it increases from there. If your income is above $151,001 for an individual, or $302,001 for a couple, the Medicare levy surcharge tax rate increases to 1.5 per cent.

This equates to tax of $2,265 for individuals and $4,530 for couples.

If you’re in this income bracket without health insurance, you are charged this extra Medicare levy surcharge tax every single day you don’t have cover.

The good news is that as soon as you take out private hospital cover, the tax goes away.

And the opportunity is that in some cases, private hospital cover can cost less than the extra tax you’d pay, meaning you effectively get private hospital cover for free and save tax at the same time.

Private hospital cover can cost less than the extra tax you’d pay, meaning you effectively get private hospital cover for free. Picture: iStock

But isn’t private health insurance expensive?

There are some private health insurance products that are quite expensive and comprehensive, but there are also cheaper options.

With the cheaper options, in a lot of cases this can cost less than the extra tax you pay if you don’t have the insurance cover in place.

Doing a quick comparison online, there are a number of private health insurance hospital cover policies that cost less than $1,000, which means you have the potential to put this cover in place, save tax, and end up way in front.

It effectively means you get health insurance for free and save tax at the same time, ending up ahead of where you’d be if you didn’t take out the cover.

The good news is that as soon as you take out private hospital cover, the tax goes away. Picture: iStock

The wrap

You work hard for your money, so you don’t pay more than your fair share. Every dollar of tax you can save is an extra dollar you can save, invest, or just use to keep up with the cost of living today.

What you need to know to use the rules to your advantage:

• The Medicare levy surcharge applies if your income is above the threshold

• The income threshold is $97k for singles and $194k for couples

• If you go above the threshold and don’t have private health hospital cover you pay extra tax

• This tax is different to the standard Medicare levy everyone pays (that you can’t avoid)

• The tax is between 1 per cent and 1.5 per cent of your income depending on your income

• If you take out health insurance, the tax goes away immediately

You work hard for your money, so you don’t pay more than your fair share. Picture: iStock

What this really means is that you’re being smarter with the rules and using them to your advantage, allowing you to make more progress faster.

Particularly in today’s cost of living crisis, people are finding the limit below which it’s hard to cut costs further. So if you want to save more without just sacrificing more or budgeting harder, if you want to get ahead, you need to be smart.

Ben Nash is a personal finance and investing expert commentator, financial adviser and founder of Pivot Wealth. You can follow more of Ben’s free content on Instagram | Facebook | Podcast.

Ben is also the author of ‘Replace your salary by Investing’ and Get Unstuck, and runs regular free online money education events, you can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.