You may have seen a recent proposal regarding making overtime tax free, it may sound simple and appealing at first glance, but a closer look suggests it could be far harder to deliver fairly, be far more complicated than it first appears and could incentivise poor practice.
The proposal put forward suggested that anyone who earns less than £75,000 and works overtime beyond a 40-hour week wouldn’t have to pay income tax on those extra hours. On the face of it, any talk of tax cuts is bound to sound appealing.
The proposer said that the overtime plan would “finally make work pay, drive up productivity and restore the appeal of a strong work culture”.
They also argued that hardworking people look around and see that work simply does not pay, that benefits can often match or beat what they earn, and that ordinary families are being pushed into higher tax bands with little to show for it.
That may well be the intention behind the policy. But at first glance, the tax break looks likely to be unfair, complex, and full of awkward side effects. So, the real question is: would it actually “make work pay”?
Who wins and who misses out?
There would no doubt be some winners. But in many industries, overtime is already paid at time and a half, or even double time, depending on when it is worked. That is a long-established and widely understood system. Once you add a tax break on top, employers may start to ask whether rewarding overtime twice, through higher rates and lower tax, is a step too far.
Then there is the issue of people on lower-hours contracts, part-time workers, those juggling multiple jobs, people not paid by the hour, and the self-employed. A strict 40-hour threshold would leave many of them out altogether. And if the policy tried to include them, the complexity of tracking and monitoring hours across different jobs would be daunting, to put it mildly.
Unintended consequences
There is another obvious problem too. What happens to people who are already contracted to work more than 40 hours a week? In practice, the policy could create a strong incentive to cap contracts at exactly 40 hours, simply so that anything above that can be classed as tax-free overtime. That would be an administrative headache to change from day one.
More broadly, giving special tax treatment to certain hours rather than to pay as a whole does not seem particularly sensible. It could also open the door to tax avoidance. Why not cut regular pay and shift more of it into overtime? That would be poor logic if you care about stable earnings, but it could still boost take-home pay for people already doing regular overtime. And from an employer’s point of view, it could also make it easier to cut overtime later without ever restoring the base rate.
More hours does not necessarily mean more productivity
So, would it really “drive up productivity and restore the appeal of a strong work culture”? That is far from clear. The policy seems designed to encourage and reward longer hours. Output per worker might rise, yes, but that is not the same thing as productivity, which is usually measured as output per hour worked. And once people are regularly working beyond 40 hours productivity in those hours often starts to fall.
Without accounting for this productivity drop, some firms might decide they can spread the same total number of hours across fewer workers, which could mean some people lose their jobs. And this matters for another reason too: the push for shorter working hours has long been seen as beneficial not just for productivity, but for health as well.
The Health Impact of Long Hours
Long hours come with well-established health and safety risks. Studies consistently link extended working hours with:
- Fatigue and reduced alertness
- Increased risk of cardiovascular problems
- Musculoskeletal injuries, particularly back pain
- Elevated blood pressure
- Mental health challenges, including stress and depression
- Adverse reproductive outcomes for women, such as lower birth weights
- Higher rates of alcohol use and, in extreme cases, suicide
If you want to read more about the wider consequences of relying on overtime, have a look at our previous blog, “The Flex Appeal of Overtime”.
What could it mean for workforce design?
It is also worth asking whether this would encourage a shift away from salaried roles, often management jobs where overtime is not paid, towards hourly contracts, simply because take-home pay would look more attractive. In company-wide working-hours redesigns where we have been involved previously, one of the hardest questions has often been deciding where a role stops being "specifically hourly paid" and starts being about doing the job. Do we really want front-line managers walking away the moment a shift ends, if there is still a problem to deal with? In any healthy organisation, there should be at least some resistance to constant clock-watching.
The problem with thresholds
Then there is the £75,000 cap. Any fixed threshold in the tax system creates distortions, and we have already seen how messy that can become in other areas, such as the income limit for child benefit.
Over the years, as flexible working has grown, so too have job shares, part-time roles, annualised hours, and term-time-only contracts. A blunt 40-hour cut-off either shuts many of those workers out completely or drags the system into a maze of complications and disincentives.
A fair way to make work pay?
So yes, some people might find ways to benefit, and there would almost certainly be a few clear winners. But for most, the gains look limited while the complications look considerable. With enough time and effort, some of the technical problems might be ironed out. Even then, though, it is hard to see this as a fair or effective way to “make hard work pay”. It may also prove expensive, with different tax experts already producing very different estimates of the cost. If the real aim is to put more money in the pockets of working people, there are much simpler and fairer ways to do so, for example by increasing the thresholds for the main tax bands.
