Reform UK’s proposal to exempt overtime pay from income tax is presented as a “hard work bonus,” but the article argues that the policy would create inequities, distort labor markets, increase complexity, and reduce tax revenue. The proposal would apply to employees earning under £75,000 and would exempt income tax on hours worked beyond a 40-hour week.
Under the proposal, eligible employees would pay no income tax on overtime hours after 40 hours per week. The stated aim is to increase take-home pay and encourage people to work additional hours.
The article argues that this type of narrow tax relief is unlikely to produce meaningful economic gains and may instead create new problems in the tax system and labor market.
Why the proposal is seen as inequitable
The policy would create different tax outcomes for workers with the same annual income.
Two people earning the same amount could face different tax bills depending only on whether their income came from regular hours or overtime. Workers in jobs with access to overtime would benefit, while workers with fixed schedules, caregiving responsibilities, or roles without overtime opportunities would not.
The article describes this as horizontal inequity: people in the same financial position would not be treated equally by the tax system.
Labor market distortions
The exemption could change how employers and workers structure compensation.
Employers may have less incentive to raise base salaries if overtime becomes tax-advantaged. They may also prefer to rely on overtime rather than hire additional staff, which could reduce broader employment and encourage excessive working hours.
The policy targets people already working substantial hours rather than encouraging labor market entry or increased participation among those working fewer hours.
The £75,000 income threshold could also create a sharp tax cliff. Workers crossing the threshold would lose access to the exemption, producing a sudden increase in the effective marginal tax rate on additional income.
Workers just below the threshold may also try to reclassify income as overtime to benefit from the exemption. The article says this could create avoidance opportunities, especially for professionals such as lawyers or consultants.
Administrative complexity and avoidance risks
A tax exemption for overtime would require employers and tax authorities to distinguish between regular pay and overtime pay.
That would add administrative burdens, increase the risk of errors, and make the tax system more vulnerable to avoidance and evasion.
The article argues that creating special tax treatment for one form of labor income would make the system more complex rather than simpler.
Fiscal cost
The proposal would reduce government revenue by around £5 billion per year.
Supporters say the policy could save a full-time nurse working six overtime hours per week more than £1,300 annually, equal to roughly £4 per hour.
The article compares the overall fiscal cost to about one-fifth of the tax increases announced in the 2025 Autumn Budget.
Supporters have suggested offsetting the revenue loss through welfare spending cuts, which the article says raises distributional concerns. It also notes that similar measures may cost more than static estimates suggest once people and employers adjust their behavior.
Given the UK’s fiscal pressures, the article argues that policymakers should question whether narrowly targeted overtime relief is an efficient use of limited public resources.
Alternative: broad-based tax reform
The article argues that if the goal is to improve work incentives and increase take-home pay, broader tax reform would be more effective.
Possible alternatives include:
- Lowering marginal income tax rates across the board;
- Increasing tax-free allowances;
- Reducing the tax burden on work more generally.
These options would provide more uniform incentives and avoid the distortions created by special treatment for overtime.
The article concludes that exempting overtime may look attractive to workers in the short term, but it would create unequal outcomes, distort labor market decisions, increase administrative burdens, and strain public finances.
A broader reform that lowers taxes on work across the board is presented as a more neutral, simple, and efficient way to support growth and living standards.
Source article: taxfoundation.org
