Is overtime pay taxed at a higher rate in the UK?

Full answer

Overtime is not subject to a special "overtime tax rate" in the UK. All employment income — wages, overtime, bonuses, commission — is aggregated and taxed at your marginal rate under Income Tax and NI rules. **Why it feels like overtime is taxed more:** The PAYE system calculates your tax each pay period by annualising your pay for that month. If in one month you earn your usual £3,000 plus £1,000 overtime (£4,000 total), PAYE assumes your annual income will be £48,000 — and may deduct tax at 40% on some of the overtime. But: - The system is cumulative: over the full tax year, your total tax is reconciled against actual annual earnings. - Any over-deduction in high-overtime months is automatically offset in lower-earnings months. - At year-end (or when you leave), any overpaid tax triggers a P800 refund or is returned via your next payslip. **When it can cause real problems:** - **Emergency tax codes (W1/M1):** If you're on a week-1 or month-1 non-cumulative code, the system cannot recalculate backwards — you may owe or be owed tax at year-end. - **Bonus payments:** A large one-off bonus may push you temporarily into the higher-rate band within a single month, triggering 40% PAYE that month. This will be corrected cumulatively if you don't actually earn above £50,270 for the full year. **Salary sacrifice to manage marginal rate:** If genuine annual income exceeds the £50,270 higher-rate threshold, directing overtime pay into your pension via salary sacrifice shelters it from both Income Tax and NI.

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