Overtime Tax UK Guide for Employers

Overtime pay is a routine feature of workforce management across many sectors, yet its tax treatment remains a point of confusion for both employers and employees. Because overtime earnings fluctuate, they can create variations in take-home pay that may lead to questions about how the amounts are taxed and why deductions appear higher in some pay periods. For HR teams and business owners, a clear understanding of how overtime interacts with PAYE and National Insurance is vital for payroll accuracy, compliance and effective communication with staff.

What this article is about: This article provides a comprehensive explanation of how overtime pay is taxed in the UK, focusing on the employer’s responsibilities when calculating PAYE and National Insurance on variable earnings. It covers what constitutes taxable overtime, how overtime interacts with tax codes and the implications for payroll compliance. It also provides guidance on managing employee queries about overtime deductions and explains why overtime can appear to increase someone’s tax rate even though tax rules have not changed.

Overtime is treated as standard earnings under UK tax law. This means that every overtime payment—whether at basic rate, time-and-a-half, double time or any enhanced rate—must be processed through payroll and is subject to PAYE income tax and National Insurance contributions in the same way as ordinary wages. Because overtime is added to an employee’s regular pay for the pay period, it can increase their total taxable income, potentially pushing more of their pay into a higher tax band for that period or altering their National Insurance thresholds. Payroll must therefore apply the correct tax code and ensure all payments are included in real time information submissions to HMRC.

Overtime can also contribute to an employee’s overall taxable income where total earnings begin to approach the personal allowance taper threshold. Under current rules, personal allowance reduces by £1 for every £2 earned above £100,000, with no allowance remaining beyond £125,140. While most employees will not reach these levels, HR teams should understand how regular or substantial overtime can influence HMRC projections and tax code adjustments.

It is also important to distinguish between how overtime is treated for tax purposes and how it may be treated for employment law purposes. For example, voluntary overtime that becomes sufficiently regular may form part of “normal remuneration” for holiday pay calculations following cases such as Bear Scotland and Flowers. This concept has no effect on PAYE: HMRC taxes all overtime in exactly the same way regardless of frequency or regularity.

Understanding these interactions helps employers maintain compliance while supporting employees who may question the deductions applied to their overtime payments. When properly understood and communicated, overtime tax does not need to be a source of confusion or dispute within the organisation.

How Overtime Tax Works in the UK

Overtime creates variable earnings, which can make payroll more complex for employers. Because overtime is not always predictable and may fluctuate from week to week or month to month, payroll teams must understand precisely how PAYE and National Insurance apply. This section explains the core tax treatment of overtime so employers can ensure accurate processing and compliance with HMRC requirements.

1. What counts as taxable overtime pay

Overtime pay includes any hours worked beyond an employee’s normal contractual hours. This may be paid at the employee’s standard rate or at an enhanced rate such as time-and-a-half or double time. Regardless of the rate applied, all overtime pay is considered taxable income. HMRC treats these payments as part of the employee’s gross earnings for the relevant pay period.

This includes:

• Overtime at the normal hourly rate
• Enhanced overtime premiums
• Guaranteed overtime, where contractually required
• Non-guaranteed overtime, where required at the employer’s request
• Voluntary overtime that becomes regular enough to be considered part of normal remuneration for employment law purposes

Overtime payments of any type must be processed through payroll, included in RTI submissions and subjected to PAYE in the same way as regular wages. Employers cannot pay overtime “off-payroll” or outside PAYE without breaching tax obligations. For tax purposes, there is no distinction between occasional and regular overtime: all such payments are treated as taxable earnings.

2. Income tax treatment of overtime

Overtime does not have a separate or higher tax rate. The misconception that overtime is “taxed more” usually arises because additional earnings can push more income into a higher tax band during that pay period. PAYE operates on a cumulative basis for most employees, meaning each payment is assessed against the individual’s total taxable income to date in the tax year. Payroll software calculates the tax bands and deductions automatically using the tax code and HMRC parameters; employers cannot choose the tax band to apply.

If overtime increases earnings in a month, more of the employee’s pay may fall into the 40 percent or 45 percent tax band, depending on their overall income, which gives the impression of higher tax on overtime. The rate has not changed; rather, the employee has crossed a tax threshold due to higher earnings.

Overtime can also reduce or eliminate the employee’s personal allowance if total annual income exceeds the personal allowance taper threshold. Under the current rules used in recent tax years, the personal allowance reduces by £1 for every £2 of adjusted net income above £100,000, with no allowance remaining once income reaches £125,140. Employers and HR teams should be aware of this interaction and ensure they regularly check up-to-date HMRC guidance, as thresholds and allowances can change over time.

Employers must apply the employee’s tax code correctly to ensure accurate deductions. Where HMRC adjusts a tax code to reflect projected higher earnings, for example because of regular overtime, that new code must be operated through payroll from the effective date shown on the notice.

3. National Insurance on overtime

National Insurance contributions (NICs) apply to overtime in the same way as other earnings. Unlike income tax, NICs are calculated on a non-cumulative basis, meaning contributions are determined solely by earnings in the pay period rather than total earnings for the year. Payroll systems calculate NICs for each earnings period using the relevant thresholds and rates in force at that time.

Overtime pushes pay above weekly or monthly NI thresholds, potentially resulting in higher Class 1 NICs for employees. Employers will also pay additional secondary Class 1 contributions on overtime earnings. For example, in recent tax years employee Class 1 NICs have been charged on earnings above a primary threshold aligned with the income tax personal allowance, while employer NICs are charged above a separate secondary threshold. The precise thresholds and percentages may change from one tax year to the next, so employers should always confirm current rates and limits from HMRC.

Because NICs are calculated per earnings period, fluctuating overtime can create noticeable changes to deductions from one period to the next. Payroll systems must ensure NI is calculated accurately based on the correct earnings period, taking into account variable hours and enhanced overtime rates. Employers should also ensure that overtime premiums do not mask issues with basic pay when assessing national minimum wage compliance.

Section A Summary Overtime pay is treated in law as ordinary taxable earnings. It is always subject to PAYE and National Insurance, with deductions varying depending on the employee’s tax code, earnings level and thresholds crossed during the pay period. Employers must therefore process overtime with the same accuracy and compliance approach applied to standard wages, relying on correctly configured payroll software and up-to-date HMRC rates and guidance.

Overtime and Tax Codes

Overtime interacts directly with PAYE tax codes, which determine how much tax is deducted from an employee’s earnings in each pay period. When overtime levels fluctuate, this can expose errors in tax coding or trigger adjustments from HMRC. HR teams and business owners need a clear understanding of how tax codes operate in practice and how overtime can influence deductions, employee expectations and payroll accuracy.

1. When overtime changes the tax code

Overtime itself does not change an employee’s tax code. However, the additional income may prompt HMRC to review the code where total taxable income increases substantially or where overtime becomes a regular part of earnings. HMRC issues updated tax codes to employers via electronic notifications known as P6 (in-year tax code changes) or P9 (start-of-year coding notices). These notices must be applied promptly in payroll so that PAYE operates correctly for the remainder of the year.

HMRC may issue a revised tax code if:

• Overtime leads to higher annual projected income
• An employee crosses into a higher tax bracket
• Personal allowance adjustments are required due to increased income
• Benefits in kind or other taxable adjustments come into scope

Payroll must apply any updated tax codes issued by HMRC promptly through RTI. Failure to do so may result in incorrect deductions and end-of-year reconciliations, leading to refunds or underpayment demands for employees.

2. Emergency tax and overtime

Emergency tax typically appears when payroll lacks the correct starter information or when the employee has not provided a P45 or completed a starter checklist. During this period, overtime may be taxed at a higher rate not because of the overtime itself but because emergency codes do not allocate the personal allowance cumulatively. Common emergency tax codes include 1257L W1/M1 or 0T W1/M1, which limit or remove the personal allowance for the calculation period.

Overtime paid under an emergency tax code can therefore seem disproportionately taxed. Once HMRC confirms the employee’s correct tax position and issues the right tax code, payroll usually adjusts automatically, with any overpaid tax refunded through subsequent pay periods.

3. Common tax code errors involving overtime

Variable earnings may lead to payroll errors or misinterpretations of how tax codes operate. Common issues include:

• Applying a non-cumulative (“Week 1/Month 1”) code incorrectly
• Failing to update codes issued by HMRC (P6 or P9 notices)
• Misallocating taxable benefits when calculating projected earnings
• Assuming overtime requires a separate tax code

Such errors can distort deductions, causing staff to question payroll accuracy. Employers must ensure payroll systems are updated and tax codes applied consistently to avoid disputes and HMRC interventions. Employers should also make clear to employees that payroll cannot manually alter tax deducted from overtime; PAYE must be applied strictly in line with the HMRC-issued tax code.

Section B Summary Tax codes determine how overtime is taxed, but overtime does not itself change the tax code. Payroll accuracy depends on correct coding, prompt implementation of P6/P9 notices, up-to-date payroll software and clear communication with employees who may misunderstand the impact of fluctuating pay on their deductions.

HR and Payroll Compliance Duties

Employers are legally responsible for ensuring that overtime is recorded accurately and processed correctly through payroll. This includes applying PAYE and National Insurance rules consistently, maintaining compliant records and avoiding practices that could expose the organisation to HMRC scrutiny or employee disputes. This section explains the core compliance duties linked to overtime pay.

1. Recording overtime accurately

Accurate record-keeping is fundamental to payroll compliance. Employers must maintain complete and reliable records of hours worked, including overtime, to calculate pay correctly and demonstrate compliance with statutory requirements. HMRC expects employers to maintain clear evidence of earnings for PAYE purposes, and the Working Time Regulations require employers to keep adequate records to show compliance with working time limits.

Recording must capture:

• Hours worked beyond contractual hours
• Applicable overtime rates
• Authorisation or approval for overtime

Overtime hours also count as working time for the purpose of national minimum wage (NMW) calculations, although overtime premiums do not. Where records are incomplete or inconsistent, employers risk errors in pay, unlawful deductions claims and difficulties demonstrating compliance during HMRC audits or employment tribunal proceedings.

2. Calculating PAYE and NI correctly

Overtime must be treated as taxable earnings and included in Real Time Information (RTI) submissions. Payroll teams must integrate all overtime hours into PAYE processing so income tax and National Insurance are calculated correctly for the period. Employers cannot manually adjust tax deductions to satisfy employee requests; tax must be calculated strictly according to the HMRC-issued code and thresholds.

Key considerations include:

• Applying the correct tax code to variable earnings
• Ensuring overtime premiums are treated as taxable income
• Using the correct earnings period for National Insurance
• Ensuring RTI submissions reflect overtime payments in full

Errors can result in over- or under-deductions, which HMRC may later correct through coding changes or compliance interventions. Late or inaccurate RTI reporting can also lead to penalties, so accurate and timely submissions are essential.

3. Impact on national minimum wage compliance

National minimum wage compliance is assessed based on basic pay, not enhanced overtime premiums. Employers cannot rely on overtime payments to compensate for shortfalls in contractual hourly rates. If an employee’s basic pay falls below the statutory minimum for their age or status, overtime earnings will not correct the breach.

Employers must also distinguish overtime hours clearly in their records to ensure accurate NMW calculations. Regular reviews of pay for workers with variable hours or overtime-heavy roles help prevent inadvertent breaches and support transparent pay structures.

Section C Summary Employers must maintain accurate overtime records, apply PAYE and NI rules correctly and ensure overtime processing does not obscure NMW compliance issues. Strong payroll practices, accurate RTI reporting and consistent record-keeping protect the business from HMRC action and employee disputes.

Managing Overtime Tax Queries from Employees

Employees often raise concerns about overtime deductions because fluctuations in their net pay can appear confusing. HR teams and business owners play an important role in explaining why deductions vary and how PAYE rules apply to variable earnings. This section provides guidance on addressing the most common queries and supporting employees in understanding their payslips.

1. Why employees think they are “taxed more” on overtime

Employees frequently assume that overtime is taxed at a higher rate. In reality, overtime is taxed at the same rate as ordinary earnings. The perception of increased taxation usually arises because overtime pushes total earnings for the period into a higher tax bracket or because the employee’s personal allowance is fully used earlier in the year due to increased income.

When earnings fluctuate, so too do deductions. National Insurance also increases for the period because NICs are calculated on a non-cumulative basis, meaning deductions rise when earnings in a particular pay period exceed NI thresholds. Clear explanations help employees understand that the tax rate has not changed; rather, increased earnings alter where the employee sits within the tax thresholds.

2. When HMRC refunds or further tax becomes due

If overtime varies significantly during the year, employees may underpay or overpay tax depending on how PAYE has operated across different pay periods. HMRC conducts automatic reconciliations at the end of each tax year. Where tax has been overpaid, the employee will receive a P800 calculation or automated repayment. Where tax is underpaid, HMRC may amend the employee’s tax code for the following year or issue a direct payment request.

Overtime can also prompt earlier adjustments if HMRC projects higher annual earnings and issues a revised tax code. These adjustments are sent to employers via P6 notices and must be applied promptly through payroll to ensure accurate deductions throughout the remainder of the year.

3. Communicating overtime tax clearly

Employees value transparency in how their pay is processed. HR teams should be able to explain:

• How overtime is added to gross earnings
• How PAYE tax bands work and why higher earnings attract higher deductions
• Why NICs fluctuate on a period-by-period basis
• How tax codes influence the amount deducted

Effective communication reduces disputes and provides reassurance that payroll is compliant. Many issues arise not from payroll errors but from misunderstandings about how PAYE and NI operate in periods of fluctuating earnings.

Section D Summary Overtime deductions often lead to employee queries, but most concerns stem from misunderstandings about PAYE and NI. Employers can prevent disputes by offering clear explanations, accurate payslips and prompt implementation of HMRC tax code updates.

FAQs

Employers and HR teams often receive repeated questions from employees about how their overtime is taxed and why deductions change. Providing clear, consistent answers helps maintain confidence in payroll processes and prevents unnecessary disputes. The following FAQs address the most common queries raised in relation to overtime tax.

Is overtime taxed at a higher rate?

No. Overtime is not taxed at a separate or higher rate. It is simply added to an employee’s gross earnings for the pay period and taxed at the appropriate income tax rate based on total taxable income. Higher deductions may appear if overtime pushes earnings into a higher tax band, but the rate itself remains unchanged.

Why does overtime reduce take-home pay more than expected?

When overtime increases gross pay, a larger portion of the employee’s income may fall into a higher tax bracket or cross a National Insurance threshold. NICs rise because they are calculated per pay period, not cumulatively. This can make deductions appear disproportionately high compared to the overtime earned.

Can overtime change an employee’s tax code?

Overtime does not directly change an employee’s tax code. However, if the additional income results in higher projected annual earnings, HMRC may adjust the tax code to collect more or less tax during the year. Updated tax codes are issued through P6 or P9 notices and must be applied promptly by payroll.

Do student loan repayments increase when someone works overtime?

Yes. Student loan repayments are based on earnings above the relevant plan threshold for the pay period. Overtime increases gross earnings, which may result in higher repayments for that period. Different repayment thresholds apply depending on whether the employee is on Plan 1, Plan 2, Plan 4 or the Postgraduate Loan scheme.

Does overtime count toward national minimum wage calculations?

Overtime hours count as working time for NMW calculations, but overtime premiums cannot be used to remedy shortfalls in basic pay. Compliance must always be assessed on the employee’s normal hourly rate before overtime enhancements.

How does overtime affect National Insurance contributions?

National Insurance is calculated on a period-by-period basis. Higher earnings in any given week or month due to overtime may lead to higher NICs for that specific pay period. NIC rates and thresholds may vary between tax years, so employers should check the latest HMRC guidance.

Can employees reclaim tax if they think too much was deducted from their overtime?

Possibly. If PAYE results in overpayment of tax during the year—often due to fluctuating overtime—HMRC may issue a P800 calculation or repayment after the tax year ends. Some adjustments may also be settled through in-year tax code changes issued to employers via P6 notices.

Conclusion

Overtime pay must be processed with the same care and accuracy as standard wages, yet its fluctuating nature often leads to confusion about how tax and National Insurance are applied. For employers and HR professionals, understanding the interaction between overtime earnings, PAYE rules and NI thresholds is critical to maintaining payroll compliance and preventing employee disputes.

Overtime is treated as taxable earnings. It is always subject to PAYE income tax and National Insurance contributions, with deductions varying depending on total earnings for the pay period, the employee’s tax code and the thresholds crossed. Overtime itself does not trigger a special tax rate, nor does it directly change an employee’s tax code. Instead, any changes arise from increased overall income or HMRC adjustments based on projected earnings.

Employees may ask payroll to adjust tax deducted from overtime, but employers must apply PAYE strictly in line with HMRC’s rules and issued tax codes. Payroll software determines the correct calculations automatically; employers cannot reduce or alter deductions at an employee’s request.

Clear communication is central to effective payroll management. When employees understand why deductions change with fluctuating overtime, confidence in payroll increases and unnecessary queries reduce. Employers must ensure accurate record-keeping, correct application of PAYE and NI rules and timely implementation of HMRC tax code updates. By maintaining strong payroll processes, businesses protect themselves from compliance risks while supporting the workforce with transparent and accurate pay information.

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