Do You Have To Give Tax On Overtime Pay?
By
HuutiMoney
In this article, we will explain the tax rules for overtime pay in the UK, how these rules affect employers and employees, and what you should do if you have questions about paying taxes on overtime pay.
Do You Have To Give Tax On Overtime Pay?
Yes, you have to give tax on overtime pay. Overtime pay is the extra money that an employee earns for working more than their standard hours. In the UK, overtime pay is taxed at the same rate as an employee’s normal pay.
This means that the rate of wage tax (income tax and National Insurance Contributions) does not change depending on the number of hours worked, or whether employees are paid for overtime or not.
According to the tax rates for 2022/23, the Personal Allowance (a sum of money where no tax is paid) is £12,570. This means that people who earn up to that amount are completely exempt from paying tax, while those who earn more than that will be required to pay tax at the appropriate rate on their total income (this includes basic and overtime pay).
Due to the implication of tax on your overtime pay, there is a strong likelihood that the addition of this amount increases your overall taxable income to an amount that falls within a higher tax bracket. This will lead to taxpayers paying taxes at a higher rate as compared to when overtime pay is not added to their standard earnings.
At the same time, there are some special rules that apply to overtime pay, which can make things complicated for both employers and employees.
How Does The Tax On Overtime Pay Affect Employers And Employees?
Employers must ensure that they deduct the correct amount of taxes from employees’ wages, including any overtime pay. This means that employers must take into consideration the tax rules for overtime pay when calculating employees’ tax deductions.
For example, employers must pay the correct tax rate for any bonus or overtime payment, even if the bonus or overtime payment is paid in one lump sum. This can be a lot of paperwork for employers and can involve a lot of calculations.
From an employee’s perspective, the taxation of overtime pay means that they may have to pay more in taxes if they are working additional hours. This can be frustrating, as employees may feel that they are not getting the full benefit of their overtime pay.
How Is The Tax Rate On Overtime Pay Applied?
The tax rate on overtime pay is applied in the same way as it applies to regular income. Below is a list of the key steps:
- First, a taxpayer’s total income is calculated. In the case of multiple incomes, this is the sum of all your incomes. In the case of overtime pay, the amount of overtime pay is added to your standard pay.
- Then the tax-free Personal Allowance of £12,570 is deducted from the sum of your income; leaving behind your taxable income.
- Finally, the appropriate tax rate is applied to your taxable income.
Therefore,
- if your total income is equal to or less than £12,570, your tax rate will be 0%
- if your total income is between £12,571 and £50,270, your tax rate will be 20%
- if your total income is between £50,271 and £150,000, your tax rate will be 40%
- if your total income is more than £150,001, your tax rate will be 45%
Does Overtime Pay Increase Your Tax Rate?
Yes, in some cases overtime pay can increase your tax rate if it increases your income to the next level at which a higher tax rate is applied. However, this depends on the amount of overtime pay that you get and the tax code applied to your income.
For instance, if your income is £50,000 without overtime pay, your tax will be calculated as follows:
Annual Income = £50,000
Less: Personal Allowance = £12,570
Taxable Income = £37,430
Amount of tax deduction = £37,430 x 20% = £7,486
Income after tax deduction = £37,430-£7,486 = £29,944
However, if you add overtime pay of £20,000, the tax rate that applies to your income will be affected as follows:
Annual Income = £50,000
Add: Overtime Pay = £20,000
Total Income – £70,000
Less: Personal Allowance = £12,570
Taxable Income = £70,000-£12,570 = £57,430
Amount of tax deduction = £57,430 x 40% = £22,972
Income after tax deduction = £57,430-£22,972 = £34,458
This indicates that even though the amount of overtime one earns can be £20,000, not only does it double the taxation rate (from 20% to 40%) but the take-home earnings will only increase by £4,514 (£34,458-£29,944).
Are There Any Exceptions To The Overtime Pay Tax Rules?
In certain circumstances, the tax rate for overtime pay may be lower than the tax rate for normal pay. This can be the case when an employer has agreed to pay employees an hourly rate for overtime that is lower than their standard hourly rate.
For example, if an employee normally earns £10 an hour and their employer agrees to pay them £8 an hour for overtime, the tax rate on the £8 an hour may be lower. If this is the case, the employee’s overtime pay will be taxed at a lower rate.
However, employers should be careful when offering lower rates of pay for overtime. In some cases, HM Revenue and Customs (HMRC) may challenge the lower rate and require the employer to pay a higher rate of tax on overtime pay.
If you are still unsure, you can use an online tax calculator to calculate your tax liability.
What Should You Do If You Have Questions About Paying Taxes On Overtime Pay?
If you are an employer or an employee, and you have questions about paying taxes on overtime pay, the best thing to do is to speak to an accountant or tax advisor. They can provide you with guidance on the correct way to calculate and pay taxes on overtime pay. You can also contact HMRC to get help with taxes.
If you are an employer, it is important that you make sure that you are following the correct procedures when it comes to the taxation of overtime pay. It is a legal requirement to pay taxes on overtime pay, and failure to do so can result in hefty fines and other penalties.
As an employee, you may be able to reduce the amount of income tax you pay on overtime pay by taking advantage of certain tax reliefs. For example, you may be able to claim tax relief on any expenses you incur in the course of overtime. It is best to speak to a qualified tax adviser who can advise you on which reliefs you may be eligible for.
Conclusion:
The above article provides guidance on how overtime pay is taxed in the UK; as well as a detailed account of the implications of adding overtime pay to standard earnings that can potentially increase the tax rate that applies to your taxable income.