How Overtime Affects Your Take-Home Pay in the UK

When you work extra hours, you expect a significantly bigger pay packet—especially if you are earning an enhanced rate like "time-and-a-half." However, in the UK, overtime is taxed exactly the same as your regular salary.

Because these earnings sit at the very top of your annual income, they are immediately subject to your highest applicable rates of Income Tax and National Insurance, and can often trigger additional student loan repayments.

This "triple hit" of deductions means the money that actually lands in your bank account is often much lower than the headline rate suggests. Before you commit to long hours or weekend shifts, it is smart to run your specific numbers through a take home pay calculator to see if the extra effort is truly worth the financial reward.

1. The ‘Stacking’ Effect: How Marginal Tax Works

Many employees believe overtime attracts a special tax rate higher than their normal pay. This is a myth. The rates remain the same, but the application changes based on where that money sits in your total income.

Think of your annual earnings as a vertical stack. The bottom block is your Personal Allowance, which is tax free. The middle block attracts the Basic Rate, and the top block attracts the Higher Rate. Your regular salary usually fills the tax free bottom section and much of the Basic Rate band.

Overtime sits at the very top of this stack. Because your base salary has already utilized your tax free allowance, every penny of overtime falls immediately into a taxable band. You pay tax on the entire amount, often making the deduction seem larger than usual compared to your average hourly pay.

For the 2025/26 tax year in England, Wales, and Northern Ireland, the bands apply as follows:

Income Band

Tax Rate

Description

£0 to £12,570

0%

Personal Allowance (Tax Free)

£12,571 to £50,270

20%

Basic Rate

£50,271 to £125,140

40%

Higher Rate

Over £125,140

45%

Additional Rate

If your salary is £37,000, you sit comfortably in the Basic Rate band. Your overtime is taxed at 20%. However, if your base salary is £48,000, a moderate amount of overtime will push the top of your stack into the Higher Rate band. This means those specific extra pounds are taxed at 40%, drastically reducing what reaches your bank account.

2. The ‘Triple Hit’: Tax, NI, and Student Loans

Income Tax is only one part of the calculation. To understand your final pay, you must account for three distinct deductions that work together to reduce your net earnings.

Income Tax (PAYE)

The payroll system operates cumulatively. It looks at your total earnings for the tax year to date. If you have a high earning month due to overtime, the software may project that you will earn this amount every month. This can sometimes trigger a temporary overpayment of tax. While this usually corrects itself in future pay periods or at the end of the tax year, it can reduce your immediate cash flow.

National Insurance (Class 1)

Unlike Income Tax, National Insurance is calculated strictly by pay period. It does not account for your annual total. If you earn heavily in one specific week or month, you pay NI on that money immediately. You cannot reclaim this later, even if your earnings drop for the rest of the year. For the 2025/26 tax year, employees pay 8% on monthly earnings between £1,048 and £4,189, and 2% on earnings above that figure.

Student and Postgraduate Loans

These deductions act as an additional tax. Once your income crosses the specific threshold for your loan plan, the Student Loans Company takes 9% of everything you earn above that line. If you have a Postgraduate loan, you pay 6% above the threshold. Because overtime sits at the top of your income stack, it typically sits entirely above these thresholds. This means the full 9% or 6% deduction applies to every extra pound you earn.

When you combine these three factors, the total deduction percentage rises quickly. A Basic Rate taxpayer with a Plan 2 Student Loan faces the following breakdown on their overtime:

Deduction Type

Percentage Removed

Income Tax

20%

National Insurance

8%

Student Loan (Plan 2)

9%

Total Deduction

37%

In this scenario, you keep only 63 pence for every pound of overtime earned. If you enter the Higher Rate tax band, the total deduction increases further.

Overtime and Holiday Pay

Many employees overlook the fact that working overtime consistently increases the value of their annual leave. Under UK employment law and significant court rulings, your holiday pay must reflect your "normal remuneration." It cannot simply default to your basic salary if you usually earn more than that through extra duties.

Employers must base holiday pay on your average earnings over the previous 52 weeks. This calculation protects you from suffering a financial loss just because you take a break. The average pay calculation includes:

• Guaranteed overtime: Hours your contract requires you to work.
• Non guaranteed overtime: Hours you must work if the employer offers them.
• Voluntary overtime: Hours you choose to work, provided you do so regularly enough for it to be considered normal pay.
• Commission and bonuses: Payments directly linked to your performance.

If you work extra hours frequently throughout the year, your pay during your four weeks of statutory annual leave should match those higher earning levels. Always check your payslip during periods of leave to ensure your employer applies this average correctly rather than reverting to your base rate.

Conclusion

Overtime remains a valid strategy to boost your income, but the headline rate often hides the true financial reality. The tax system treats these earnings as top slice income, meaning they attract the highest deductions possible for your specific situation.

While you may earn "time and a half" on paper, the combination of Income Tax, National Insurance, and student loan repayments can significantly reduce the final amount.