Overtime pay is a standard feature of workforce operations across many UK industries, yet the taxation of overtime remains a frequent source of misunderstanding for both employers and employees. Because overtime earnings fluctuate, take-home pay can vary significantly from one pay period to the next, often raising questions about how deductions are calculated and why overtime appears to attract higher tax. For HR teams and business leaders, a precise understanding of how overtime interacts with PAYE income tax, National Insurance and payroll coding is essential to maintaining compliance and providing clear explanations to staff.
What this article is about: This article provides a comprehensive explanation of how overtime pay is taxed in the UK, with a focus on employer responsibilities in applying PAYE and National Insurance to variable earnings. It explains what counts as taxable overtime, how overtime affects PAYE tax codes, and how fluctuations in earnings influence deductions. It also explores why overtime can give the impression of being “taxed more”, even though the underlying tax rules remain unchanged, and sets out practical guidance for HR teams handling employee queries.
Overtime earnings are treated as normal taxable income under UK tax law. Every overtime payment—whether paid at the employee’s standard hourly rate, time-and-a-half, double time or any other premium—must be processed through payroll and subjected to PAYE tax and National Insurance in exactly the same way as ordinary wages. Because overtime is added to an employee’s total earnings for the pay period, it can push part of their income into a higher tax band or increase National Insurance for that specific period. Payroll must therefore apply the correct tax code and include all overtime payments in real time information submissions to HMRC.
Where overtime contributes to higher annual earnings, it may also influence the reduction of personal allowance under the taper rules. Employees with income above £100,000 see their personal allowance reduced by £1 for every £2 of income over that threshold, with no allowance remaining once income reaches £125,140. Although these levels affect a minority of employees, HR teams must understand how substantial overtime can influence HMRC projections and result in coding adjustments.
It is equally important to distinguish PAYE tax treatment from employment law treatment. Case law such as Bear Scotland and Flowers confirms that sufficiently regular voluntary overtime may count towards “normal remuneration” for holiday pay calculations. This has no impact on tax: HMRC taxes all overtime in the same way regardless of frequency or regularity.
A clear understanding of these interactions supports payroll accuracy, reduces disputes and helps employers explain deductions confidently to staff. When processes are applied correctly, overtime tax does not need to be a source of confusion.
Section A: How Overtime Tax Works in the UK
Overtime leads to variable earnings, which can make payroll calculations more complex. Because overtime is unpredictable and may fluctuate from week to week or month to month, payroll teams must understand precisely how PAYE and National Insurance apply to ensure accurate deductions and full compliance with HMRC rules. This section sets out the core tax principles governing overtime so employers can process payments correctly and explain deductions clearly.
1. What counts as taxable overtime pay
Overtime pay refers to payment for hours worked beyond normal contractual hours. Overtime may be paid at the employee’s usual hourly rate or at an enhanced rate, such as time-and-a-half or double time. Regardless of the rate, all overtime earnings count as taxable income. HMRC treats every overtime payment as part of the employee’s gross earnings for that pay period.
This includes:
- Overtime paid at the normal hourly rate
- Enhanced overtime premiums
- Guaranteed overtime (contractually required)
- Non-guaranteed overtime (worked at the employer’s request)
- Voluntary overtime that becomes sufficiently regular to count as part of “normal remuneration” for holiday pay purposes
All overtime payments must be processed through payroll, included in Real Time Information submissions and subjected to PAYE in the same way as ordinary wages. Employers cannot pay overtime outside PAYE or treat it as non-taxable without breaching tax obligations. For income tax purposes, there is no distinction between occasional overtime and regular overtime: all are treated as taxable earnings.
2. Income tax treatment of overtime
Overtime is not taxed at a higher rate, nor is there a separate overtime tax rate. The belief that overtime is “taxed more” usually comes from how PAYE interacts with fluctuating income. PAYE operates cumulatively for most employees, meaning each payment is assessed against total taxable income to date in the tax year.
If overtime increases monthly or weekly pay, a larger proportion of earnings may fall into the 20%, 40% or 45% income tax bands, giving the impression that overtime is taxed more heavily. The tax rate has not changed; rather, the employee has crossed an income threshold because of higher pay.
Overtime can also reduce or eliminate personal allowance where total annual earnings exceed the taper threshold. Under the current framework, personal allowance decreases by £1 for every £2 over £100,000, disappearing entirely by £125,140. Employers should regularly check updated HMRC guidance for changes to thresholds.
Accurate application of tax codes is essential. HMRC may adjust a tax code if projected annual income increases, including because of regular overtime. Employers must apply new codes immediately when notified through electronic P6 or P9 notices.
3. National Insurance on overtime
National Insurance contributions (NICs) apply to overtime in the same way as other earnings. NICs operate on a non-cumulative basis, meaning contributions depend solely on earnings in the specific pay period, not total earnings for the year. Payroll systems calculate NICs using the correct thresholds and rates applicable for that period.
When overtime pushes pay above National Insurance thresholds, employees may pay more Class 1 NICs. Employers will also incur additional secondary NICs on the overtime earnings. As NIC thresholds and rates vary between tax years, employers must consult the most up-to-date HMRC information.
Because NICs fluctuate according to earnings in the period, employees may see noticeable changes in take-home pay from one period to the next. Payroll teams must ensure correct NI categorisation, the correct earnings period and accurate application of variable hourly rates.
Employers should also monitor overtime to ensure it does not obscure minimum wage risks. Overtime premiums cannot be used to correct shortfalls in basic pay when calculating national minimum wage compliance.
Section A Summary: Overtime pay is treated as standard taxable earnings. It is always subject to PAYE and National Insurance, with deductions changing depending on tax codes, earnings levels and thresholds crossed within the pay period. Employers must therefore process overtime with the same precision and compliance focus applied to ordinary wages.
Section B: Overtime and Tax Codes
PAYE tax codes play a central role in determining how much tax is deducted from an employee’s earnings, including overtime. Because overtime payments fluctuate, changes in pay can expose coding errors or trigger amendments from HMRC. HR teams, payroll managers and business owners must understand how tax codes operate in practice and how overtime interacts with them, especially when employees question unexpected deductions.
1. When overtime changes the tax code
Overtime itself does not alter an employee’s tax code. However, the additional income may prompt HMRC to review and adjust the code if the individual’s projected annual income increases significantly. Tax codes are used to allocate the correct amount of tax-free income and to recover underpayments or apply adjustments for benefits in kind. When HMRC updates a code, employers receive an electronic P6 notice (for in-year changes) or a P9 notice (for the new tax year) and must apply the new code promptly.
HMRC may issue a revised code when:
- Overtime increases projected annual income
- The employee moves into a higher tax bracket
- The personal allowance needs adjusting due to higher earnings
- Benefits in kind or other taxable elements become relevant
Employers must apply updated tax codes immediately through payroll so PAYE operates correctly for the remainder of the year. Delays may result in inaccurate deductions, discrepancies at year end or HMRC recovery actions.
2. Emergency tax and overtime
Emergency tax applies when payroll does not have the correct starter information—usually when an employee has not provided a P45 or completed a starter checklist. Emergency tax codes, such as 1257L W1/M1 or 0T W1/M1, limit or remove personal allowance on a period-by-period basis rather than cumulatively. This means overtime paid during an emergency coding period can appear disproportionately taxed because the employee’s tax-free allowance is not fully allocated.
Once HMRC confirms the correct tax details and issues the appropriate tax code, payroll must apply it immediately. Any overpaid tax is normally refunded automatically through subsequent payroll cycles, restoring cumulative assessment where applicable.
3. Common tax code errors involving overtime
Fluctuating overtime can highlight or amplify tax coding errors within payroll systems. Mistakes typically arise where tax codes are applied incorrectly, not updated promptly or misunderstood by staff or employees. Common issues include:
- Incorrect use of non-cumulative (Week 1/Month 1) codes
- Failure to implement P6 or P9 coding notices from HMRC
- Incorrect projection of taxable benefits when determining coding adjustments
- Assuming overtime requires a separate or special tax code
Such errors can lead to over- or underpayment of tax, employee dissatisfaction and HMRC interventions. Payroll teams must ensure that coding updates are implemented promptly and that employees understand that tax cannot be amended manually at their request. PAYE must operate strictly in line with the tax code issued by HMRC, regardless of how much overtime an employee works.
Section B Summary: Overtime does not directly change an employee’s tax code, but fluctuations in earnings can prompt HMRC to issue coding updates. Accurate implementation of P6 and P9 notices, correct application of cumulative and non-cumulative codes and clear communication with employees are essential to payroll compliance and accurate overtime tax deductions.
Section C: HR and Payroll Compliance Duties
Employers have clear legal responsibilities when processing overtime, particularly in relation to PAYE, National Insurance and national minimum wage compliance. Overtime must be calculated accurately, recorded properly and reported to HMRC in line with statutory requirements. Failure to meet these obligations exposes the organisation to enforcement action, employee disputes and payroll irregularities. This section outlines the core compliance duties that employers must meet to ensure overtime is processed lawfully and transparently.
1. Recording overtime accurately
Accurate time and pay records form the foundation of compliant payroll practice. Employers must maintain reliable, up-to-date records of all hours worked, including overtime, to calculate wages correctly and evidence compliance with tax and working time law. HMRC requires employers to retain detailed wage and deduction records for PAYE purposes, while the Working Time Regulations require employers to keep adequate records demonstrating compliance with weekly working limits, night work rules and rest entitlements.
Overtime records should clearly capture:
- Hours worked beyond contractual hours
- The overtime rates applied
- Approval or authorisation of overtime
Overtime hours also count as working time for national minimum wage (NMW) calculations, although overtime premiums do not. Incomplete, missing or inconsistent records can result in incorrect pay calculations, unlawful deduction claims, or difficulties demonstrating compliance during HMRC reviews or employment tribunal proceedings.
2. Calculating PAYE and NI correctly
All overtime must be treated as taxable earnings and reported to HMRC through Real Time Information (RTI). Payroll teams must incorporate all overtime hours into PAYE calculations so that income tax and National Insurance are assessed accurately for the relevant pay period. Employers cannot manually adjust tax or NI deductions to satisfy employee requests. PAYE must be applied strictly based on the employee’s tax code, cumulative or non-cumulative basis and the HMRC thresholds in force.
Key compliance considerations include:
- Applying the correct tax code to fluctuating earnings
- Ensuring overtime premiums are treated as taxable income
- Using the correct earnings period for National Insurance calculations
- Including all overtime payments in RTI submissions
Errors in PAYE or NI may result in overpayments, underpayments, and later corrections by HMRC through coding adjustments or compliance activity. Late or inaccurate RTI submissions can also trigger penalties, making timely and accurate reporting essential.
3. Impact on national minimum wage compliance
National minimum wage compliance is determined by the worker’s standard hourly rate, not overtime enhancements. Overtime cannot be used to remedy shortfalls in basic pay. Employers must ensure that employees receive at least the statutory minimum hourly rate for their age or worker category before overtime premiums are applied.
Where workers have variable hours or rely heavily on overtime, employers must review pay regularly to ensure minimum wage compliance is maintained. Overtime hours must be clearly distinguished in payroll records to ensure transparency and accurate NMW calculations. Employers who rely on overtime-heavy schedules without monitoring basic pay levels risk inadvertent breaches.
Section C Summary: Employers must accurately record overtime, calculate PAYE and National Insurance using HMRC-approved rules, and ensure minimum wage compliance is never obscured by overtime premiums. Strong payroll systems, thorough record-keeping and timely RTI reporting protect the organisation from HMRC scrutiny and strengthen transparency for employees.
Section D: Managing Overtime Tax Queries from Employees
Employees frequently raise concerns about the tax deducted from overtime because fluctuations in net pay can be difficult to interpret without an understanding of PAYE and National Insurance rules. HR teams and business owners play a key role in explaining these deductions clearly and helping employees understand why overtime can produce varying take-home pay. This section highlights common employee concerns and offers guidance on providing clear, compliant explanations.
1. Why employees think they are “taxed more” on overtime
A common misconception is that overtime is taxed at a higher rate. In reality, overtime is taxed exactly the same as standard earnings. The perception of higher taxation usually arises because overtime pushes more income into a higher tax band during that particular pay period. PAYE operates either cumulatively or, in some cases, on a Week 1/Month 1 basis, meaning that any increase in taxable earnings affects how much of the employee’s pay falls into each tax threshold.
National Insurance contributions also increase when overtime raises earnings above NI thresholds for that period. Because NI is calculated on a non-cumulative basis, even modest increases in pay can trigger noticeably higher NICs for that specific period. Clear communication helps employees understand that the underlying tax rules have not changed—only their position within the thresholds has shifted.
2. When HMRC refunds or further tax becomes due
Fluctuating overtime can result in employees paying too much or too little tax over the course of the tax year, depending on how PAYE has operated across different periods. At the end of the tax year, HMRC carries out an automatic reconciliation of total tax paid against the amount actually due. If an employee has overpaid, they may receive a P800 calculation or an automatic repayment. If tax has been underpaid, HMRC may adjust the employee’s tax code for the following year or issue a direct payment request.
Significant overtime may also trigger in-year adjustments if HMRC projects higher annual income. In such cases, updated tax codes are issued via P6 notices, and employers must apply them immediately to ensure accurate deductions for the remainder of the year.
3. Communicating overtime tax clearly
Transparent communication helps prevent misunderstandings and payroll disputes. HR teams should be able to explain:
- How overtime is incorporated into gross pay
- How PAYE tax bands operate and why higher earnings can lead to higher deductions
- Why National Insurance fluctuates per pay period
- How tax codes influence deductions and why payroll cannot manually override PAYE calculations
Many employee concerns arise not from payroll errors but from uncertainty about how PAYE and NIC rules function when earnings fluctuate. Clear explanations, accurate payslips and prompt implementation of updated tax codes help build trust and reduce confusion.
Section D Summary: Employee questions about overtime tax usually stem from misunderstanding rather than incorrect payroll processing. Employers can minimise disputes by explaining how PAYE and National Insurance interact with fluctuating earnings, ensuring tax codes are up-to-date and providing transparent, consistent communication.
FAQs
Employees and HR teams often seek clarity on how overtime is taxed and why deductions change when earnings fluctuate. Addressing these questions consistently helps ensure transparency and maintain confidence in payroll processes. The following FAQs cover the issues most commonly raised about overtime tax.
Is overtime taxed at a higher rate?
No. Overtime is not subject to a special or higher tax rate. Overtime earnings are added to the employee’s total taxable income for the pay period and taxed in line with the standard income tax bands. If overtime pushes income into a higher tax bracket, a greater proportion of pay may be taxed at 40% or 45%, creating the impression of higher taxation even though the rate itself has not changed.
Why does overtime reduce take-home pay more than expected?
When overtime increases gross earnings, the employee may cross an income tax or National Insurance threshold for that period. NICs in particular are calculated per pay period, not cumulatively, meaning that higher earnings in that week or month automatically lead to higher NIC deductions. These factors can cause overtime to reduce net pay by more than anticipated, even though the underlying tax rules are unchanged.
Can overtime change an employee’s tax code?
Overtime does not directly alter a tax code. However, if overtime increases an employee’s projected annual income, HMRC may update the tax code to reflect the revised estimate. Updated codes are sent to employers via electronic P6 or P9 notices. Employers must apply these changes immediately to ensure PAYE deductions remain accurate for the remainder of the tax year.
Do student loan repayments increase when someone works overtime?
Yes. Student loan deductions are based on earnings above the relevant threshold for the pay period. Overtime increases gross pay, which may lead to higher repayments for that particular period. The repayment amount depends on the employee’s loan type—Plan 1, Plan 2, Plan 4 or the Postgraduate Loan scheme—and the thresholds applicable to that plan.
Does overtime count toward national minimum wage calculations?
Overtime hours count as working time for the purpose of national minimum wage (NMW) calculations, but overtime premiums do not. Employers must ensure that a worker’s basic hourly rate meets or exceeds the statutory minimum before taking any overtime premiums into account. Overtime cannot be used to mask underpayment of NMW.
How does overtime affect National Insurance contributions?
National Insurance is calculated per pay period. When overtime raises earnings above the NIC thresholds, contributions increase accordingly. Because NICs do not operate cumulatively, deductions may vary significantly from one pay period to the next, depending on the level of overtime worked.
Can employees reclaim tax if too much was deducted from overtime?
Possibly. If PAYE calculations throughout the year result in too much tax being paid—often due to fluctuating overtime—HMRC may issue a P800 calculation or an automatic refund after the end of the tax year. HMRC may also make corrections during the year by issuing an updated tax code to the employer via a P6 notice.
Conclusion
Overtime pay must be processed with the same accuracy and compliance focus applied to ordinary wages, but its variable nature often makes the resulting deductions appear more complicated. Understanding how overtime interacts with PAYE, National Insurance and tax codes is essential for employers seeking to maintain accurate payroll records and provide clear explanations to employees.
Overtime is treated as taxable income and is always subject to PAYE and National Insurance, just like standard pay. Deductions vary depending on how overtime affects an employee’s tax band, their National Insurance thresholds and the tax code applied through payroll. Overtime does not have a separate tax rate and does not itself change a tax code, although HMRC may issue coding updates if overtime significantly increases projected annual income.
Employers cannot manually adjust tax deducted from overtime at an employee’s request because PAYE must operate strictly in line with HMRC rules and the tax codes issued. Instead, compliance relies on properly configured payroll software, accurate overtime records, timely submission of RTI data and clear communication with employees about how deductions are calculated.
When these processes are followed consistently, employees gain confidence in their payslips and employers reduce the risk of disputes, corrections or HMRC intervention. A detailed understanding of overtime taxation strengthens payroll integrity and supports a transparent, compliant working environment.
Glossary
| PAYE (Pay As You Earn) | The system employers use to deduct income tax and National Insurance from employee earnings before payment. Employers must report deductions to HMRC through Real Time Information (RTI). |
| Tax Code | A code issued by HMRC indicating how much tax-free income an employee is entitled to and how PAYE should be calculated. Adjustments may reflect benefits in kind, projected earnings or previous underpayments. |
| National Insurance Contributions (NICs) | Deductions from employee earnings and employer-paid contributions that fund state benefits. NICs are assessed on a period-by-period basis rather than cumulatively. |
| Cumulative Tax Basis | A PAYE method where tax is calculated based on total taxable income from the start of the tax year to the current pay period. Most standard tax codes operate on this basis. |
| Non-Cumulative (Week 1/Month 1) Basis | A PAYE method where tax is calculated only on earnings for the current pay period, disregarding earlier income. Commonly used for temporary or emergency tax codes. |
| Overtime Premium | An enhanced rate of pay—such as time-and-a-half or double time—applied to overtime hours. These premiums count as taxable earnings but do not contribute to national minimum wage calculations. |
| Real Time Information (RTI) | The HMRC reporting system requiring employers to submit payroll data every time an employee is paid, including overtime earnings. |
| National Minimum Wage (NMW) | The statutory minimum hourly pay that employers must provide to eligible workers. Overtime premiums cannot be used to correct underpayment of the worker’s basic hourly rate. |
Useful Links
| GOV.UK – PAYE for Employers | Official HMRC guidance on PAYE operations, employer obligations and payroll reporting. |
| GOV.UK – Tax Codes | Information on how tax codes work, why they change and how employers must apply updates. |
| GOV.UK – Income Tax Rates | Current tax bands, thresholds and personal allowance rules. |
| GOV.UK – National Insurance | Guidance on National Insurance thresholds, contributions and employer responsibilities. |
| GOV.UK – National Minimum Wage | Latest statutory rates for national minimum wage and national living wage. |
| GOV.UK – Student Loan Repayments | Rules on repayment plans, thresholds and how fluctuating earnings affect deductions. |
| DavidsonMorris – Overtime Tax Guide | Detailed explanation of how overtime is taxed, PAYE implications and employer compliance considerations. |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing & Content Agency for the Professional Services Sector.
