Farage's £5 Billion Overtime Tax Scrap: What it Means for Your Pay Packet

Nigel Farage's Reform UK has put forward a proposal to scrap income tax on overtime, a policy estimated to cost the Exchequer £5 billion annually. This 'hard work bonus' is designed to benefit individuals earning less than £75,000 per year, provided they have already completed a 40-hour working week.

Under current UK law, overtime earnings are treated no differently from regular salary. They are subject to both income tax and National Insurance Contributions (NICs) through the Pay As You Earn (PAYE) system. HMRC explicitly states that overtime remuneration constitutes taxable employment income and is aggregated with an employee's regular salary, unlike some other jurisdictions that apply special rates.

How Overtime is Taxed Today

To understand the potential impact, it's crucial to grasp the existing tax landscape for extra hours. For the 2023/2024 tax year, the Personal Allowance stands at £12,570, meaning earnings up to this amount are tax-free. Beyond this, income is taxed at:

• Basic Rate: 20% on income between £12,571 and £50,270.
• Higher Rate: 40% on income between £50,271 and £125,140.
• Additional Rate: 45% on income exceeding £125,140.

National Insurance Contributions (NICs) are also a factor. Employees currently pay 12% on earnings between £12,570 and £50,270, dropping to 2% on earnings above £50,270. Employers, for their part, contribute 13.8% on earnings above the Secondary Threshold.

The 'Hard Work Bonus' Proposal

Reform UK's plan would remove the income tax component from overtime pay for eligible workers. This means that while National Insurance Contributions would still apply, the significant chunk taken by income tax would no longer be deducted. The eligibility criteria are clear: an annual income below £75,000 and the completion of a standard 40-hour week before overtime hours begin.

The ONS Annual Survey of Hours and Earnings (ASHE) from 2024 indicates that the average UK worker undertaking overtime puts in approximately 4.2 hours per week beyond their standard hours. Men tend to work more overtime, averaging 4.8 hours compared to 3.5 hours for women. This suggests a broad demographic could see a direct uplift in their take-home pay for extra effort.

Scenario: What This Could Mean for Your Pay Packet

Let's consider two hypothetical scenarios based on the average overtime worked:

Scenario 1: Basic Rate Taxpayer

Imagine an individual earning £35,000 per year, working 4 hours of overtime per week at £15 per hour. This equates to an additional £60 per week, or £3,120 annually.

• Currently: This £3,120 is subject to 20% income tax (£624) and 12% NICs (£374.40). Total deductions: £998.40. Net overtime: £2,121.60.
• Under Proposal: With income tax scrapped, only 12% NICs (£374.40) would be deducted. Net overtime: £2,745.60.
• Annual Saving: A tidy £624, representing the full 20% income tax saved on their overtime earnings.

Scenario 2: Higher Rate Taxpayer

Consider someone earning £60,000 per year, working 4 hours of overtime per week at £25 per hour. This adds up to £100 per week, or £5,200 annually.

• Currently: This £5,200 is subject to 40% income tax (£2,080) and 2% NICs (£104, as their base salary already places them in the higher NICs band for additional earnings). Total deductions: £2,184. Net overtime: £3,016.
• Under Proposal: Only 2% NICs (£104) would be deducted. Net overtime: £5,096.
• Annual Saving: A substantial £2,080, directly from the 40% income tax no longer applied to their overtime.

What Critics Say: The Fiscal Implications

While the 'hard work bonus' promises a tangible benefit to individual workers, the estimated £5 billion annual cost raises questions about its broader economic implications. Such a significant revenue reduction would necessitate either spending cuts elsewhere, increased borrowing, or finding alternative revenue streams. Reform UK has not yet detailed how this cost would be offset, a point that will undoubtedly draw scrutiny from economic commentators and rival parties. The Bank of England, for its part, maintains a stance of complying with all tax legislation and utilising incentives where available, without adopting aggressive interpretations.

What this means for you

If this proposal were enacted, any additional net income from overtime could be strategically managed. For instance, you might consider directing these extra funds into a Cash ISA for tax-free savings, or if you're a first-time buyer, a Lifetime ISA could offer a 25% government bonus on contributions up to £4,000 per year. Remember, interest earned on standard savings accounts may be subject to tax above your Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate). Always explore ISA options before committing large sums to standard accounts.

When Effective

It is crucial to remember that this is currently a proposal from Reform UK. It would only become effective if the party were to form a government and successfully legislate the change. There is no immediate impact on how overtime is taxed today in 2026.

Where to Get Help

For personalised advice on managing your finances, particularly regarding tax-efficient savings and investments, consulting an independent financial adviser is always recommended. HMRC's official website also provides comprehensive guidance on current income tax and National Insurance rules.

This is not financial advice. Seek independent financial guidance. Interest on standard accounts may be subject to tax above your Personal Savings Allowance.