Why does overtime feel taxed at 60%? The real reason — and what to do about it

The complaint is universal: "I did 10 hours of overtime this month and I barely noticed any difference in my take-home." It is a real and valid frustration — but it is important to understand why it happens, because the cause is not a special punitive overtime tax. It is a combination of much simpler things.

There is no special overtime tax rate

Let us be clear from the start: the UK has no special rate of tax for overtime pay. Your overtime is taxed in exactly the same way as your regular salary — through PAYE, at your marginal income tax rate and National Insurance rate.

The reason overtime feels so heavily taxed usually comes down to one of three things:

1. Overtime pushes you into a higher tax band

PAYE tax works on marginal rates. If your regular salary sits just below the £50,270 higher-rate threshold and your overtime pushes total pay above it, the overtime income above £50,270 is taxed at 40% instead of 20% — plus only 2% NI instead of 8%. This is a real and significant increase in effective tax on those extra pounds.

2. PAYE annualises your pay

When you receive extra pay in a single month, your payroll system calculates your tax as if you will earn that amount every month for the whole year. If you earn £3,000 normally and receive £500 overtime in one month, the system treats you as earning £3,500 × 12 = £42,000 per year rather than your normal £36,000. This can push you into a higher effective PAYE calculation for that month, even if your annual income stays in the basic rate band. The system corrects over time, but the temporary over-deduction can feel jarring.

3. Student loan deductions compound the effect

If you have a student loan, 9% (Plan 2) or 9% (Plan 5) is deducted on all earnings above the repayment threshold — including overtime. At £35,000 base salary, a £500 overtime payment loses: 20% income tax, 8% NI, and 9% student loan = 37p in every £1 deducted, leaving you just 63p. That feels like a lot for a full hour of extra work.

The real maths — what does overtime actually cost in tax?

Here is what you actually take home from £100 of overtime at different income levels in 2026/27:

• Salary £20,000 (basic rate, no student loan): 20% tax + 8% NI = 28% deducted. Take-home: £72
• Salary £35,000, Plan 2 student loan: 20% + 8% + 9% = 37% deducted. Take-home: £63
• Salary £50,000 (at the higher rate threshold): 40% + 2% = 42% deducted. Take-home: £58
• Salary £55,000 (higher rate band): 40% + 2% = 42% deducted. Take-home: £58

These are not particularly exceptional rates — they are the same rates you pay on any income at those levels. The reason overtime feels worse is usually psychological: you worked extra and expected to see a proportionate extra reward, but tax applies regardless of how hard you worked for the money.

Reform UK's proposed overtime tax exemption

In May 2026, Reform UK proposed exempting overtime pay from income tax — similar to a policy introduced in the United States under the Trump administration. The idea would mean overtime worked above your contracted hours would be paid tax-free, significantly increasing take-home for workers who regularly do extra shifts.

However, tax analysts have pointed out significant practical difficulties:

• Definition problem: What counts as overtime? Many workers are paid salary with no distinct "overtime rate".
• Relabelling risk: Employers could simply relabel regular hours as "overtime" to reduce tax liability without changing working patterns.
• Cost: The OBR estimated the policy could cost £5–8bn per year if widely adopted.

As of July 2026, the proposal remains a manifesto commitment from an opposition party — it has not been adopted by the Labour government.

Holiday pay must include regular overtime

One important point that many workers miss: if you regularly work overtime, your employer must include it in your holiday pay calculation. HMRC rules require holiday pay to reflect your normal pay — and if overtime is a regular feature of your work, it is part of normal pay.

Your employer calculates holiday pay based on your average pay over the previous 52 weeks. If overtime is excluded, your holiday pay may be incorrect. Use our holiday pay calculator to check if you are being underpaid when you take leave.

Overtime vs a salary increase — which is better?

Purely from a tax perspective, a formal salary increase is taxed in exactly the same way as overtime. However, a salary increase has these additional advantages:

• It increases your pensionable pay (more into your pension automatically)
• It is guaranteed income, not dependent on extra hours
• It affects your mortgage eligibility assessments
• It permanently increases your income for all benefits calculations

Use our salary comparison calculator to compare what different salary levels actually pay after tax.

Frequently Asked Questions

My payslip shows I was taxed at 40% on overtime even though I earn £30,000 — how?

This is the PAYE annualisation effect. If you earned £2,500 normally but had £1,500 overtime in one month (total £4,000), PAYE treats you as earning £48,000 a year (£4,000 × 12). That puts part of your income into the higher-rate band for that month's calculation. Over the full year, this self-corrects and you will receive the excess tax back through lower deductions in quieter months or via a tax refund.

Can I put overtime pay into my pension to avoid tax?

Yes — if your employer's pension scheme calculates contributions on your total pay including overtime, contributions are deducted before tax, reducing your taxable income. If you have a salary sacrifice pension arrangement, you can sometimes arrange for a higher percentage to be deducted from overtime months specifically. This is worth discussing with your HR or payroll team.

I am on zero hours — all my pay is effectively overtime. Does that change anything?

No. All earnings from employment are taxed in the same way regardless of whether you are on a fixed-hours or zero-hours contract. The PAYE rules apply identically. If you work variable hours and your income varies significantly month to month, you may find PAYE over-deducts in busy months and under-deducts in quiet ones, settling over the full year. Use our take-home calculator to check monthly figures.

Does working extra shifts affect my Universal Credit?

If you receive Universal Credit, additional earnings reduce your UC payment by 55p for every £1 you earn above your work allowance. This means overtime can have a combined effective rate of income tax (20%), NI (8%), and UC taper (55%) applied to earnings above the UC work allowance — a genuine effective marginal rate above 80%. See our UC calculator to model your specific situation.

Is bank holiday pay taxed differently?

No. Bank holiday pay, even if paid at a premium rate (e.g., double time), is taxed in exactly the same way as normal pay through PAYE. There is no special exemption or different rate for bank holiday work. Many workers confuse the gross premium rate with the tax treatment — the higher gross pay simply means more tax in absolute terms, but at the same rates.