How to pay overtime: a guide to employer obligations

Millions of UK employees work overtime to boost their salaries and help employers grow their businesses. But overtime comes with specific rules governing how employees are paid and taxed, and how employers factor in holiday pay and annual leave.

Employers must process overtime payments to comply with employment law and tax rules. There are complex eligibility criteria, working time rules, and limits on how much overtime an employee can work and how much they should be paid for it.

This article will cover what overtime pay is, whether employers have to pay overtime, whether employees must work overtime, overtime tax rules, how payments are calculated, how overtime impacts holiday pay and annual leave, overtime for part-time workers, and the legal factors employers need to consider.

What is overtime pay?

Overtime is extra work an employee performs for their employer, beyond what is agreed in their employment contract. Overtime pay is the pay they receive for working the extra hours.

Many employment contracts include information on the employer’s overtime policy, including overtime payment rates, how overtime is calculated, and how much overtime can be worked.

There are many reasons why an employee may work overtime: to meet a deadline, to cover for an absent colleague, to manage a rise in demand or an increased workload, or to earn extra money when overtime funds are available.

Employers do not have to offer overtime but if they do, they should include an overtime policy in employee contracts.

Do employers have to pay overtime?

No, employers do not have a legal requirement to offer overtime to workers. They do not always have to pay employees for overtime either. It depends on the terms and conditions in an employee’s contract.

Some employers include a contract clause that states an employee can be asked to work overtime for no extra pay, usually to fulfil orders or meet deadlines.

In practice, overtime can be voluntary, with employers not obliged to offer it and employees not forced to work overtime when offered it.

Overtime can also be guaranteed, whereby employers are contractually obliged to offer it and employees must accept it, or it can be non-guaranteed, whereby employers do not have to offer it, but if they do, employees must accept it.

There is no minimum statutory overtime rate an employer must pay. It depends on the industry and contractual agreement in place. In practice, employers usually pay time and a half (1.5 times the normal hourly rate) to employees for working overtime. This can increase when employees work overtime during unsocial hours, for instance, overnight or on Christmas Day.

Employers must ensure the average hourly rate for all hours an employee works is not below the national minimum wage.

Do employees have to work overtime?

There is no statutory requirement for employees to work overtime. It usually depends on whether the employee’s contract includes overtime and how it is offered to the worker by the employer; voluntary, guaranteed, or non-guaranteed.

The only way overtime can be compulsory is if it is included in the employee’s contract. If so, it takes the form of either guaranteed or non-guaranteed overtime. A contract should include details of the employer’s overtime policy, including whether an employee has to work overtime and what they will be paid for it.

Working hour rules under the Working Time Regulations 1998 Act can override contractual clauses, and is another factor affecting whether an employee can work overtime and if employers can offer it, but employees can opt out of this working time directive. All employees are also legally entitled to one day off a week, which can be averaged out over two weeks.

What are the UK laws governing overtime?

Startups must adhere to employee working time and break regulations. Employees do not have to work for more than 48 hours a week unless they opt out of these regulations. They are entitled to a 20-minute break for every six hours worked.

Younger workers aged below 18 are entitled to two days off per week, which is not averaged over a two-week period and should be on consecutive days. They are also entitled to a 12-hour break between shifts, and a rest break of 30 minutes if the working day lasts more than 4.5 hours.

Even unpaid overtime hours count in terms of total hours worked to comply with national minimum and living wage calculations.

Employers must apply their overtime policy consistently to all employees, otherwise they could face discrimination claims from employees – for example, those who are excluded from overtime while others aren’t. This means employers’ overtime policies need to be fair, transparent, and non-discriminatory.

How is overtime calculated?

Overtime is usually paid at time and a half. This means that, for every hour of overtime worked, an employee receives their hourly pay, plus an additional 50%.

For weekends and Bank Holidays, double time often applies. So, for every hour of overtime worked, employees receive double their hourly rate.

Employers need to maintain accurate records of overtime rates to ensure overtime pay is calculated correctly and reported compliantly to HMRC. Mistakes can lead to pay disputes and impact morale for affected employees.

The general formula for calculating overtime is simple. Overtime pay = number of overtime hours worked x overtime rate.

So, if someone is paid £15 per hour and works 10 overtime hours at time and a half, the overtime is paid at £22.50 per hour and the calculation is:

10 x £15 = £150 x 1.5 = £225

The overtime rate should be in each employee’s contract and part of an employer’s terms and conditions for employing staff.

Overtime calculations should be conducted by payroll professionals as part of their payroll calculations.

Employers can also use HR and payroll software to manage overtime payments. This can integrate with further reporting tools, like a time-tracking app that offers a clock-in/clock-out feature to track overtime hours, approve overtime requests, and process overtime pay accurately.

How is overtime taxed?

Overtime is taxed using the PAYE system. Overtime pay is added to an employee’s normal salary for the period, and taxed according to the employee’s tax code.

This means the employee’s monthly tax-free allowance is set against their regular salary, and the overtime is taxed at:

• 20% for basic rate taxpayers
• 40% for higher rate taxpayers
• 45% for additional rate taxpayers

For 2024-25, Class 1A National Insurance is charged at 8% of all earnings, including overtime, between £242 and £967 per week.

What are the different types of overtime?

Overtime can be voluntary or compulsory depending on an employee’s contract and the employer’s overtime policy. As we’ve discussed already, the three main types of overtime are voluntary, compulsory guaranteed, and compulsory non-guaranteed.

If an employer needs employees to work overtime, they should publish their overtime policy and ensure compulsory guaranteed or non-guaranteed overtime is included in their employees’ contracts.

If an employee refuses to work overtime as detailed in their contract, the employer could decide this is a breach of contract and take disciplinary action. However, unless overtime is guaranteed, the employer can stop an employee from working overtime.

How is holiday pay factored into overtime?

All forms of overtime can be included when calculating holiday pay. If an employee only occasionally works overtime, it is not usually included.

According to Citizens Advice, if an employee has regularly worked overtime – for instance, five out of eight weeks – holiday pay should include overtime payments.

In 2017, a new ruling, the Employment Appeal Tribunal (EAT), was introduced. This states that, for workers who regularly do overtime, these hours must be included when working out their holiday entitlement. Legally, employers need to incorporate overtime into at least four weeks of the 5.6 weeks of annual leave all full-time employees are entitled to.

In most cases, the number of hours overtime an employee performs will vary. Employers should base the amended amount of holiday pay on the employee’s average weekly pay over 52 weeks, which includes all overtime worked in the prior year, not just their basic salary.

Time off in lieu and annual leave

Employees can be offered time off in lieu (TOIL), or ‘banked hours’, as an alternative to overtime payments.

TOIL represents an agreement to reimburse employees for extra hours worked with paid time off. The extra hours are often treated as time and a half, so if an employee works 10 extra hours, they receive 15 hours in TOIL.

Employers must ensure that, when applying TOIL to employees’ average pay for the total number of hours worked, the overall hourly rate the employee is paid over the year doesn’t fall below the national minimum wage.

TOIL can give employers an option to get staff to work extra hours in busy times, without having to pay additional wages. Some employees may also prefer more time off to extra wages.

Overtime for part-time workers

Employers are legally required to apply the same overtime policy for part-time workers as for full-time employees.

Overtime for a part-time worker will usually consist of the extra hours worked above what is in their employment contract.

Conclusion

Overtime benefits employers by ensuring priority jobs are completed on time and by covering staff illness or holidays. Employees benefit from overtime as a way to increase earnings.

Employers must offer a consistent overtime policy, available to all staff, including part-time workers. The policy should outline overtime pay rates, whether overtime is voluntary or compulsory, and how it impacts holiday pay and annual leave.

You can find out more about paying overtime from HMRC.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.