Why does overtime feel
taxed at 60%?
You work a grueling 10-hour weekend shift, look at your payslip, and wonder why you even bothered. Here is the brutal reality of how overtime is actually taxed in the UK.
The True Cost of Extra Hours
What happens to £150 of Overtime?
Let's say you do 10 hours of overtime at £15/hr. The UK doesn't have a specific "overtime tax", it just stacks your normal deductions. Here is exactly what is sliced off that £150 before it reaches your bank account.
The 40% Glitch
The PAYE Annualisation Trap
The most common reason people swear they are being taxed at 40% (even when they only earn £30,000) is because of how payroll software handles sudden spikes in income. We call this the PAYE Annualisation Trap.
When you get a fat overtime paycheck in a single month, HMRC’s software doesn't know it's a one-off. It assumes you are going to earn that amount every single month for the rest of the year.
- Normal Month: You earn £2,500. PAYE calculates your tax based on a £30,000 annual salary. You pay basic 20% tax.
- The Overtime Month: You smash out the hours and earn £4,500 this month.
- The Trap: The software calculates £4,500 × 12 months = £54,000 projected salary.
- The Result: Because £54,000 is above the higher-rate threshold, it taxes a chunk of your overtime at 40%, leaving you with a shockingly low net pay.
The good news: This automatically fixes itself. In the following months, when your pay returns to normal, the software realizes it over-taxed you. You will either pay slightly less tax in the subsequent months to balance it out, or you'll get a tax rebate at the end of the year. You never actually lose the money, you just lose it for that month.
The "Triple Tax" Student Loan Effect
If you look at the data table above, the £35,000 worker with a student loan is getting absolutely hammered. Why? Because student loans are calculated as a flat 9% on everything you earn over the threshold.
So, while Income Tax takes 20%, and National Insurance takes 8%, the Student Loan company swoops in and takes another 9%. That is a massive 37% effective tax rate on a totally average salary. For every £10 you earn in overtime, you only keep £6.30. It's brutal, but mathematically correct.
Overtime vs A Salary Increase
From a pure tax perspective, a formal salary raise is taxed identically to overtime. However, a permanent salary increase is infinitely better for your financial health.
A salary increase permanently bumps up your employer pension contributions, makes you eligible for better mortgages, and guarantees the income without burning yourself out on weekend shifts. If you are consistently relying on overtime to pay the bills, it might be time to use our salary comparison calculator and start negotiating your base rate.