Overtime is another way through which people can earn more cash and hence is worthy to be considered. However, you may be asking yourself how overtime pay is taxed in the UK as well as the percentage of the amount that is likely to be deducted. In this blog, the writer provides all the information you may require to understand taxation on overtime.
What Counts as Overtime?
First, there is the issue of what exactly constitutes overtime. Overtime pay means any hours beyond your scheduled weekly working hours as stated in your contract of employment. For instance, if your contract indicates that you should work 37.5 hours a week and your work hours were 45, then the extra 7.5 hours are considered overtime.
They also include working hours that you spend on extra duties that are outside your working hours – evenings, weekends, public holidays, etc. What defines it is that it is extra work that is beyond the normal working hours of the employment contract.
This paper seeks to assess how Overtime is taxed in the United Kingdom of Great Britain and Northern Ireland.
This means that any amount paid to you as salary in the UK is liable to tax, including the extra cash you get from overtime. The amount of tax deducted from your overtime depends on:
- Your tax code
- What total income category puts you in the specified tax rate
- However, it will impact on whether one is eligible to claim tax reliefs such as the Personal Allowance
Thus, the overtime pay is further included in your original pay before the calculation of the tax. For example, if you received £1500 in gross pay and £100 in overtime your total gross pay becomes £1600.
From there, the amount of PAYE tax is deducted depending on your tax code. For instance, if you fill in a tax code 1257L, you can make £12,570 per year without paying any tax beyond the standard 20% for basic income tax rate on other income. You can get help from the Payroll Management System.
Overtime and National Insurance
Remember, your overtime pay is also liable to NICs whether you are an online or offline employee. The standard NIC rate is:
- 12% NICs are paid on overtime earnings if they are between £184 and £967 per week.
- It has insisted on keeping 2% NICs above £967 weekly earnings.
These NIC thresholds are correlated with the Personal Allowance and the Higher Rate Tax threshold quantities.
Claiming Tax Reliefs: You might be able to lower your tax bill on overtime pay by claiming relevant tax reliefs, such as:
Personal Allowance: £540 more tax-free in the 2022-23 tax year
Marriage Allowance: You can give £1,260 of your Allowance to your spouse/civil partner if it will be of benefit to them and save Income Tax in the process if you do not pay it yourself
Uniforms: If you used your money to purchase uniforms or tools needed during overtime then you can claim the money as tax relief.
Professional fees: Possible exemption in taxes for professional organization fees due to your overtime work
Maintain paperwork and receipts so that in the event of claiming any reliefs or deductions that are permitted by law, you can do so effectively.
Tax calculations based on an overtime example
Let's look at a quick example to see overtime tax percentages in action:
Tom, in our contracted job, would earn £24,000 per year normally. He performed overtime, with 10 hours in a month, which increased his pay by £100. His total pay for that month would be:
Normal Pay: £2,000
Overtime Pay: £100
Total pay: £2,100
To be sure, his income is below £50,270, which means that all his earnings are taxed at the 20% basic rate. Hence, £20 income tax and £13 NICs will be charged for his £100 overtime pay.
This means that through taxes and NIC contributions, Tom can retain only about one-third of his overtime income. It’s impossible to know the precise deductions taken from his pay but this gives a general picture of what typical tax rates on overtime are in the UK.
Summary
Even if having tax and National Insurance taken away is quite annoying, it is necessary to pay what is due for the overtime income. Ensure you take any tax relief that is due and be able to support the claim by providing records.
If you have any doubts, then it is advisable to consult a tax specialist or an accountant to be clear on your responsibilities as to how the law applies when it comes to the tax regime for overtime pay in the UK.
