Labour’s increase to employer National Insurance as part of the 2024 Budget may well have been the worst tax rise it was possible to come up with – leading only to lower wages and reduced employment. Now Reform UK appear determined to find the worst possible tax cut, with their proposal to exempt overtime from income tax.
The party calls it a ‘hard work bonus’, says it will cost £5 billion a year, and that welfare cuts will pay for it. It is a clever and bold piece of PR. It is also, on almost any view, terrible.
Reform have caught a disease normally found on the left – they’re ignoring incentives. They think their policy encourages more overtime. The actual inventive it creates is to encourage more work to be labelled as overtime
Reform have tried to stop the relief being exploited by high earners by saying it will only apply to those earning less than £75,000. That creates a cliff edge of almost comic proportions.
Take someone on a £60,000 salary who has £14,999 of overtime. Their total pay would be £74,999, and their overtime would be income-tax-free. But give them a £1 pay rise and the exemption would disappear. Their tax and NIC bill would jump up by about £6,000. The marginal tax rate on that final pound would be 600,000 per cent. That is not a typo. They would have to earn £85,000 before they were back in the same financial position. A policy supposedly designed to reward hard work would, at the £75,000 point, punish it catastrophically.
