Is overtime taxed more?

No. Overtime is added to your pay for the period and taxed at the same rates as the rest of it, and there is no special overtime tax. The catch is that every extra pound sits on top of the pay you already get, so it is taxed at your highest rate, and student loan and pension deductions can come off as well. In a basic rate job in England, a typical overtime pound loses 28p to tax and National Insurance before any loan or pension.

Where the myth comes from

Most people judge their tax by the payslip. A month with lots of extra shifts often shows a much larger tax figure, and it feels out of proportion. Three things are going on.

Overtime is the top slice of your pay. Your basic salary has already used your Personal Allowance, so none of the overtime is tax-free. If your normal pay already uses the allowance, 100 per cent of the overtime is taxed, against a much lower share of your basic pay.

Deductions also stack. On top of 20 per cent Income Tax there is 8 per cent National Insurance, and a Plan 2 student loan with earnings above its threshold adds another 9 per cent. That is 37p in the pound before pension.

The higher rate can also kick in for a month, which gets its own section below.

What you keep from overtime: a worked example

Say you earn £30,000 a year in England, paid monthly, so £2,500 a month. You do £400 of overtime in one month. You have a Plan 2 student loan and your overtime is not pensionable.

Deduction on the £400	Rate	Amount
Income Tax	20%	£80
National Insurance	8%	£32
Student loan Plan 2	9%	£36
You keep		£252

Without a student loan you would keep £288. In Scotland on £30,000 your top rate is the intermediate rate of 21 per cent, so the tax would be £84.

Pensionable overtime also has your pension contribution taken, at your scheme’s rate. In the NHS Pension Scheme someone on £30,000 pays 8.3 per cent. Public sector pension contributions come off before Income Tax, so they reduce the tax a little, but National Insurance stays the same.

Why one big month can be taxed at 40 per cent

PAYE usually works on a cumulative basis. Each month payroll compares your total pay since 6 April with the total allowance and basic rate band you have had so far. A big overtime month early in the year can push you into the higher rate on paper for that month, and a quieter month then pulls you back and the tax is corrected.

Say a band 6 nurse on £39,959 does £1,500 of extra shifts in April, the first month of the tax year. Monthly pay that month is around £4,830. The basic rate band available for month one is a twelfth of £37,700, plus a twelfth of the allowance, so some of the April pay is taxed at 40 per cent. If May is normal, cumulative pay drops back inside the band and the extra tax is given back through the payslip. Over the whole year, tax is charged at 40 per cent only on income above £50,270, and this nurse’s total pay is well below that.

The correction happens only on a cumulative code. With an emergency code ending in W1, M1 or X, each period stands alone, and the extra tax stays with HMRC until it reviews your year. See our guide to emergency tax codes if your code ends that way.

National Insurance runs the other way. It is worked out on each pay period alone and is never corrected later. Employee NI is 8 per cent up to £4,189 a month and 2 per cent above that, so a single large month can mean less NI on the top slice.

When overtime really does cost you more

A few genuine cases leave you with less of the extra pay than you might expect:

• crossing £50,270 (or £43,662 in Scotland), where the rate on pay above the line rises to 40 per cent, or 42 per cent in Scotland
• income between £100,000 and £125,140, where the Personal Allowance is withdrawn and the effective rate is 60 per cent; see the £100,000 tax trap
• adjusted net income moving over £60,000 if you get Child Benefit, which brings in the High Income Child Benefit Charge
• moving into a higher pension contribution tier, because some public sector schemes set your rate by actual pensionable pay
• losing some Universal Credit, which is reduced as earnings rise

None of these turns overtime into a loss. You still keep part of every extra pound, just a smaller part than at lower earnings.

Bank shifts versus overtime

In the NHS, extra hours can be paid as overtime by your own department or as bank shifts through the trust’s staff bank. Rates can differ, and so can the tax treatment. A bank that counts as a separate employment may be taxed on a BR code, which looks like flat 20 per cent tax on every shift. That is the second job rule and no higher rate is involved. Our page on tax on NHS bank shifts explains it, and unsocial hours enhancements covers the extra rates for nights and weekends.

To see what a change in hours does to your monthly pay, put your salary plus a year’s expected overtime into the take-home pay calculator. If the tax on your overtime still looks wrong after a few months, check your tax code and ask payroll how the overtime was processed.