Medicare Levy Surcharge: Why not having private health insurance can cost at tax time

It’s tax time and many of us will be hoping for a handy tax return windfall. But there can also be a nasty surprise for some.

Tax time is upon us and some Australians will have found themselves facing a nasty surprise related to private health insurance, or lack of it.

By paying for private hospital cover, Australians with lower and average incomes may save on tax – with those earning more than $90,000 a year likely to save the most.

“There are many arguments for and against private health cover. But the one thing most people can agree on is, paying for private hospital cover will save most Australians some tax money,” explains Kent Griffin from etax accountants.

“That’s because the Australian government designed a system that uses tax to ‘encourage’ everyone to get private cover, even though we have a national healthcare system – Medicare.

“If you don’t have private cover, then as your income grows over time, the amount you pay to the government in extra taxes increases so fast that getting private cover can become cheaper than paying that tax surcharge.”

Health insurance means you avoid the Medicare Levy Surcharge

If you don’t have private health insurance you get slugged with an extra tax known as the Medicare Levy Surcharge (MLS), which is in addition to the Medicare Levy.

Almost all Australians pay 2 per cent of their taxable income as the Medicare Levy. This money goes towards funding parts of the public healthcare system.

“If you earn over a certain threshold, which is $90,000 for singles and $180,000 for couples, taking out private health insurance is a good way to save on tax,” explains Vince Scully, founder of online financial planner Life Sherpa.

“The surcharge can vary between 1 per cent and 1.5 per cent depending on your circumstances. It’s possible to buy basic hospital cover, which costs less than the MLS you’d have to pay without it,” he adds.

You’ll be entitled to a private health insurance rebate

The private health insurance rebate is an amount the government contributes towards the cost of your health insurance premiums, depending on your income. The rebate can be paid to you as part of your tax return or used to reduce premiums across the year.

Eligibility for the health insurance rebate is based on income and age. Those earning $140,000 or less as a single, or $280,000 or less as a family and who are entitled to Medicare can apply.

If you are entitled to it, it’s important to understand that the rebate you receive each year will be reduced if the average premium increase for all health insurers is higher than the Consumer Price Index.

Depending on your income, the rebate this year is up to 24.6 per cent of your health cover for under 65s.

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If you’re 31, you can avoid Lifetime Health Cover Loading

Lifetime Health Cover loading (LHC) is a financial loading payable on top of a policy if you fail to take out (or keep) private hospital cover before your 31st birthday. This amounts to 2 per cent of the policy cost per year for every year you are over 30, up to a maximum of 70 per cent.

“Currently around a million Australians pay higher premiums due to an LHC loading on their hospital policy,” explains Jessie Petterd, spokesperson at insurance comparison site iSelect.

“Because LHC compounds, the longer you wait to take out cover the more unaffordable it can become later in life.”

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Switching health insurance may seem like a lot of effort. And for some, it might not be worth it but for others, simply shopping around could mean saving up to a few hundred dollars per year.

“EOFY is a good time for everyone to review their finances and look for ways to save money in the year ahead or maximise their tax return,” explains Ms Petterd.

“Now is the time to give yourself a ‘financial health check’ to make sure you start the new financial year on the right foot by reviewing all your bills and expenses (including health insurance).

“Many health funds are also offering great deals and introductory offers at the moment such as waiving waiting periods or several months free so it’s a really good time to shop around.”

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Originally published as Medicare Levy Surcharge: Why not having private health insurance can cost at tax time