Overtime, bonuses and how they are taxed in the United Kingdom
Reviewed by Mellow Editorial Team, HR & payroll content team
Overtime and bonuses are taxed as earnings in the same way as regular salary — through PAYE, using the employee's existing tax code and National Insurance category. There is no special rate for extra pay; it simply adds to the employee's total taxable income for the year.
How PAYE applies to additional earnings
When you pay overtime or a bonus, the amount is added to the employee's gross pay for that pay period. Your payroll software then calculates income tax and National Insurance on the combined figure.
For income tax, the rates are:
- 20% on earnings above the personal allowance of £12,570 up to the basic-rate limit
- 40% on earnings in the higher-rate band
- 45% on earnings above the additional-rate threshold
For National Insurance, employees pay 8% on earnings within the main rate band, then 2% above the upper earnings limit. Employers pay 13.8% on earnings above the secondary threshold — including any overtime or bonus amounts.
Nothing about the tax calculation changes because the payment is called a bonus or overtime. What does change, sometimes, is when and how the payment lands in the payroll cycle.
The timing of bonus payments matters
A one-off bonus paid in a single month can push an employee into a higher tax band for that pay period, even if their annual earnings would sit entirely in the basic-rate band. This happens because payroll software typically annualises each month's pay to estimate the full-year liability.
In practice, this means a £3,000 bonus paid in June might attract 40% income tax in that pay period, even for a basic-rate taxpayer. The employee is not necessarily overpaying — if their annual income stays below the higher-rate threshold, the excess tax is reconciled through Self Assessment or an automatic PAYE adjustment at year-end. But it can cause confusion, and it is worth flagging to employees in advance.
If you have flexibility over when you pay a bonus, consider whether spreading it across two pay periods or aligning it with a lower-earnings month reduces the annualisation effect. This is a practical payroll decision, not tax avoidance.
Reporting requirements under RTI
All additional earnings must be reported to HMRC through Real Time Information. You submit a Full Payment Submission (FPS) on or before each payday — this applies to overtime and bonus payments exactly as it does to regular salary. There is no separate or later deadline for variable pay.
If you pay a bonus outside your normal payroll run — for example, an ad hoc payment mid-month — you still need to submit an FPS for that payment on or before the date the money reaches the employee. Missing this deadline can trigger late-filing notices from HMRC.
At year-end, all earnings including overtime and bonuses must appear on the employee's P60, which you are required to issue by 31 May following the end of the tax year. If you have provided benefits alongside a bonus (for example, a non-cash award), the relevant amounts go on the P11D, due by 6 July.
Employer National Insurance on bonuses
Employer NI at 13.8% applies to the full value of a bonus above the secondary threshold, which is a meaningful cost to factor into your budget. If you are planning a bonus round, calculate the employer NI liability upfront — a £10,000 gross bonus across ten employees carries a significant additional NI cost on top of the headline figure.
Some employers use salary sacrifice arrangements to deliver part of a reward through pension contributions, which can reduce the NI liability for both parties. The employee's pension receives more, and the employer's NI bill falls. This needs to be set up correctly and agreed in writing before the pay period in question. Auto-enrolment minimums require at least 3% employer and 5% employee contributions on qualifying earnings, but voluntary contributions above those thresholds can be structured through salary sacrifice.
Overtime, bonuses and employment contracts
From a legal standpoint, the Employment Rights Act 2025 strengthens day-one rights for employees, which includes clearer entitlements around pay transparency. If overtime rates or bonus eligibility are contractual, they must be honoured and paid correctly through payroll. Discretionary bonuses remain discretionary, but once a pattern of payment is established, employees may have reasonable grounds to expect them.
Make sure your contracts are clear on whether overtime is paid at a flat rate or a premium rate, and whether bonuses are contractual or discretionary. That distinction affects what you are legally obliged to pay, how you communicate changes, and how the payments should be described on payslips.
Keeping payslips clear — showing overtime hours and rate separately, or labelling a bonus as such — reduces queries from employees and makes reconciliation easier at year-end.
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