Farage's Overtime Tax Cut: What it Means for Your Pay Packet

The average UK worker who undertakes overtime currently clocks in approximately 4.2 extra hours per week, hours that are fully subject to income tax under the existing system. This status quo is now in the crosshairs of Reform UK leader Nigel Farage, who has proposed making all overtime pay entirely tax-free.

The Current Landscape: How Overtime is Taxed

Under present UK tax law, overtime earnings are not treated as a separate category. They are simply added to your regular salary and subjected to the standard income tax rates and bands through the Pay As You Earn (PAYE) system. This means that once your Personal Allowance of £12,570 is utilised by your regular income, every additional pound earned from overtime is taxed from the first penny.

For the 2026/27 tax year, the basic rate of 20% applies to taxable income between £12,571 and £50,270. Earnings above £50,270 up to £125,140 are subject to the higher rate of 40%, and anything beyond £125,140 attracts the additional rate of 45%. Furthermore, for those with adjusted net income exceeding £100,000, the Personal Allowance is tapered away, leading to an effective marginal tax rate of 60% within the £100,000 to £125,140 income bracket.

It is also crucial to note that overtime payments are subject to Class 1 National Insurance contributions, just like standard pay. Employers also contribute their share of NICs on these payments.

HMRC states: "Overtime earnings are treated as normal taxable income under UK tax law. Every overtime payment... must be processed through payroll and subjected to PAYE tax and National Insurance in exactly the same way as ordinary wages."

Farage's Proposal: A Tax-Free Incentive

Nigel Farage's proposal aims to provide a direct financial boost to workers facing rising costs. The stated objectives include encouraging part-time staff to take on extra hours, helping to fill labour shortages, increasing disposable incomes, and ultimately boosting productivity and strengthening the UK economy.

Scenario: What This Could Mean for Your Take-Home Pay

To illustrate the potential impact, let's consider a few scenarios based on the average 4.2 hours of overtime per week, as identified by the ONS Annual Survey of Hours and Earnings (ASHE) from 2024. For simplicity, we'll assume an average overtime rate of £15 per hour, leading to approximately £252 in overtime pay per month, or £3,024 annually. This calculation focuses solely on the income tax element, as National Insurance Contributions would still apply under the proposal.

• Basic Rate Taxpayer (20%): If your overtime falls within the basic rate band, you would currently pay £604.80 in income tax on £3,024 of annual overtime. Under the proposal, this entire amount would be saved, directly increasing your take-home pay by £604.80 per year.
• Higher Rate Taxpayer (40%): For those whose overtime pushes them into the higher rate band, the income tax paid on £3,024 of annual overtime currently stands at £1,209.60. Scrapping this tax would mean an additional £1,209.60 in your pocket annually.
• 60% Effective Rate Taxpayer (due to Personal Allowance taper): If your adjusted net income exceeds £100,000, your Personal Allowance is gradually withdrawn. For an individual earning, for example, £100,000 and doing £3,024 in overtime, that overtime would currently be taxed at an effective 60% rate. This translates to £1,814.40 in income tax. A tax-free overtime policy would save this entire sum, offering the most significant proportional benefit to this group.

While these figures represent a clear increase in disposable income for those working paid overtime, it's worth noting that a significant portion of overtime in the UK is unpaid. The TUC estimated in 2023 that £26 billion worth of unpaid overtime is worked annually, with 3.8 million people doing unpaid overtime in 2024, averaging 7.2 unpaid hours a week. These workers, of course, would see no direct benefit from a tax exemption on paid overtime.

But There Are Risks: The Revenue Question

Income Tax is the single largest source of revenue for the UK government, estimated to raise £329 billion in 2025-26, representing 26.7% of all receipts. While HMRC does not publish specific figures for income tax derived solely from overtime, any policy that removes a portion of taxable income will inevitably impact government coffers. The scale of this impact would depend on the total volume of paid overtime in the economy and the tax bands of the individuals performing it.

The administrative implications for employers would also need careful consideration. Implementing a separate tax treatment for overtime pay would require adjustments to payroll systems and processes, potentially adding complexity for businesses.

When Effective

This proposal is currently a policy pledge from Reform UK. It is not current government policy and therefore has no immediate effect. Any implementation would depend on the outcome of a general election and subsequent legislative processes.

What this means for you

If you regularly work paid overtime, this proposal could directly increase your take-home pay, providing more disposable income. You might consider channelling any extra funds into tax-efficient savings vehicles. A Cash ISA allows you to save tax-free, while a Lifetime ISA offers a 25% government bonus on contributions up to £4,000 per year for first-time buyers, potentially adding up to £1,000 annually. For those saving into standard accounts, remember that interest above your Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers) is subject to tax.

Where to Get Help

For current tax rules and guidance, the official GOV.UK website and HMRC resources are the primary sources of information. For personalised financial planning, seeking advice from an independent financial adviser is always recommended.

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