Medicare Levy Thresholds Increased 2.9% for 2026

The Medicare levy threshold 2026 increased by 2.9% in the Federal Budget delivered on 12 May 2026, extending relief to approximately 1 million low-income Australians who would otherwise pay the full 2% levy on their income. The change is modest in dollar terms for any single taxpayer, but it keeps low-income individuals and families exempt from the levy as their incomes rise.

Disclaimer: This article provides general information only and does not constitute tax advice. Consult a registered tax agent for advice specific to your circumstances.

What Changed in the Budget

The 2026-27 Federal Budget, delivered to Parliament on 12 May 2026, includes a measure to increase the Medicare levy low-income thresholds by 2.9% across all categories. According to Budget Paper No. 2, the increase applies from 1 July 2025, so it covers the 2025-26 income year (the tax return you lodge from July 2026). The singles threshold rises from $27,222 to $28,011, and the family threshold from $45,907 to $47,238.

The threshold increase applies to the individual low-income threshold, the family income threshold, the seniors and pensioners threshold, and the family threshold for seniors and pensioners. Each of these categories gets the same 2.9% uplift. The result is that taxpayers whose 2025-26 income sits just above the old 2024-25 threshold may now fall below it, eliminating or reducing their Medicare levy liability.

The government estimates that around 1 million low-income earners, families, pensioners, and seniors will benefit from the change. The cost to the Budget is relatively small (the levy is waived or reduced, not paid out), and the measure is uncontroversial. Similar indexation has been applied in most recent Budgets, meaning the 2026-27 change is consistent with established practice rather than a new direction in policy.

Who Benefits

Low-income earners under the standard threshold

Individuals whose taxable income falls below the updated individual threshold pay no Medicare levy at all. With a 2.9% increase to the threshold, some earners who previously paid a partial or full levy will move below the line entirely. Part-time workers, casual employees, and those returning to the workforce after a break are the most likely to benefit in this category.

Family taxable-income earners (couple/family threshold)

Couples and families are assessed against a combined family income threshold that increases for each dependent child. The 2.9% uplift applies to the base family threshold, and the per-dependent-child increment is also adjusted. A family where one partner works part-time and the other is the primary earner may find the combined figure moves just enough to reduce the lower-income partner's levy.

Seniors and pensioners (separate, more generous threshold)

Seniors eligible for the seniors and pensioners tax offset (SAPTO) have access to a higher Medicare levy threshold than working-age taxpayers. This recognises that many retirees live on fixed incomes from superannuation or the Age Pension, which the SAPTO already partially shelters. The 2.9% uplift applies equally here, so retirees whose income sits just above the current SAPTO-linked threshold may see their levy obligation fall or disappear.

Single-parent families

Single parents are assessed under the family income threshold (not the lower individual threshold), which is more generous. With the 2.9% increase, single-parent families with one or two dependants are among the clearest beneficiaries, particularly where the parent works part-time to balance caring responsibilities.

How the Medicare Levy Reduction Actually Works

The Medicare levy is ordinarily 2% of your taxable income. But applying that rate to every dollar of income earned by a low-income earner would be punitive, so the ATO administers a low-income reduction that phases the levy in gradually.

Below the threshold, you pay nothing. Above the threshold but within what the ATO calls the shade-in zone, you pay a reduced rate: the levy increases progressively as your income rises, rather than jumping from 0% to 2% the instant you cross the line. Once your income exceeds the top of the shade-in zone, the full 2% applies.

This design means there is no hard cliff. A taxpayer earning $1 more than the threshold does not suddenly owe a large sum. The shade-in rate is set so the levy increases smoothly until it matches the standard 2% rate, at which point the reduction falls away. The ATO's Medicare levy reduction page publishes the current thresholds and shade-in rates each year after Budget night.

Worked Example (Illustrative)

Consider a single sole trader with a taxable income of $28,000 for FY2025-26. Under the old singles threshold of $27,222, that income would sit in the shade-in zone, with a partial Medicare levy of about $78 (10% of the $778 above the threshold). With the threshold raised to $28,011 for 2025-26, the same $28,000 of income now falls below the threshold, reducing the levy to nil.

This is illustrative only. Your actual levy depends on the ATO's published thresholds for 2025-26 and on your circumstances, such as family income, dependants and eligibility for the seniors and pensioners tax offset. Use the sole trader tax calculator to model how the threshold change and other Budget measures interact with your specific income. For a broader look at deductions that affect your taxable income (and therefore your position relative to these thresholds), see the guide to tax deductions Australian freelancers miss.

What This Doesn't Affect

The threshold increase is targeted and narrow. Several things remain unchanged:

Medicare Levy Surcharge (MLS): The MLS is a separate charge that applies to higher-income earners who do not hold an appropriate level of private hospital cover. The 2026-27 Budget did not change MLS income thresholds or rates. If you earn above the MLS threshold and lack private hospital cover, this Budget measure does not help you.

The standard 2% rate: Once your income exceeds the shade-in zone, the Medicare levy remains 2% of taxable income. The Budget increased the entry threshold, not the rate at which the levy is charged.

Income tax rates: Income tax rates and brackets are set separately. The cuts to the bottom rate (16% to 15% from 1 July 2026, then 14% from 1 July 2027) were legislated before this Budget, and the Budget adds a new $250 Working Australians Tax Offset from 2027-28. Medicare levy and income tax are calculated independently, though both feed into your overall tax liability.

For a full rundown of the EOFY tax checklist that covers both Medicare levy and income tax obligations before 30 June, that guide has everything you need to prepare.

Interaction with the Income Tax Cuts

The Medicare levy threshold increase does not exist in isolation. Lower earners also get income tax cuts: the 16% rate on taxable income between $18,201 and $45,000 falls to 15% from 1 July 2026 and to 14% from 1 July 2027 (both already legislated), and the 2026-27 Budget adds a $250 Working Australians Tax Offset from 2027-28. These measures work in the same direction: reducing the overall tax burden on Australians earning modest incomes.

For a sole trader or part-time worker near the lower end of the income scale, the combined effect of a reduced income tax liability and an eliminated or reduced Medicare levy could amount to a meaningful improvement in after-tax income, without any change in earnings. The details of these changes are covered in the Working Australians Tax Offset and Budget 2026 changes post, which is worth reading alongside this one.

Frequently Asked Questions

How much does the Medicare levy threshold change in the 2026-27 Budget?

The low-income thresholds rise by 2.9% from 1 July 2025, so the increase applies to the 2025-26 income year. This means more low-income earners qualify for either no Medicare levy or a reduced rate.

Who benefits from the threshold increase?

Approximately 1 million low-income individuals, families, pensioners, and seniors. The biggest beneficiaries are part-time workers, retirees with modest super-stream income, and single-parent families.

How is the Medicare levy normally calculated?

The standard Medicare levy is 2% of taxable income. Low-income reductions apply to taxpayers earning under the relevant threshold, with a shade-in zone above the threshold to avoid a sharp cliff.

Does the Medicare Levy Surcharge change too?

No. The threshold change applies only to the standard Medicare levy and its low-income reduction. The Medicare Levy Surcharge (which targets higher earners without private hospital cover) is unchanged.

Will I see this on my next tax return?

Yes. The increase applies from 1 July 2025, so the ATO uses the new thresholds when it assesses your 2025-26 tax return.

Where do I check if I qualify?

The ATO publishes the current thresholds and the shade-in zones each year on its Medicare levy reduction page. Your taxable income, family income, and seniors/pensioner status determine eligibility.

Whether the Medicare levy reduction matters for your specific income depends on more than the headline threshold. It hinges on your total taxable income, family situation, and any deductions you can legitimately claim. Taxr captures your expense receipts as you go and sorts them into ATO-aligned categories, with GST totals in your Excel or PDF export, so come tax time you have the evidence for your deductions and a clearer picture of where you land relative to the thresholds. For sole traders and freelancers, this is especially important: the lower your taxable income, the more likely you are to benefit. Explore how Taxr works for sole traders, or Download Taxr and start building the record that makes your tax return straightforward.