Overlay combines the effects of Multiply and Screen to increase contrast. Dark areas become darker, while light areas become lighter, with the base layer determining which effect is used.
The Math
Overlay treats 50% gray as a neutral point. Colors darker than 50% gray darken the base using a Multiply-like effect, while colors brighter than 50% gray lighten it using a Screen-like effect.
Mathier Math
Overlay uses different calculations depending on whether the base color is darker or lighter than 50%:
Dark base: Multiply-like calculation
Light base: Screen-like calculation
The important part is that 50% gray is neutral. It sits exactly in the middle of the available brightness range, so it leaves the base color unchanged.
Think of 50% gray as the zero on a contrast slider: move below it and things get darker; move above it and things get brighter.
Core Rules of Overlay
50% gray disappears: Pure 50% neutral gray on the top layer has no effect on the base layer.
Lights get lighter: Bright colors on the top layer brighten the base layer, using a Screen-like effect.
Darks get darker: Dark colors on the top layer darken the base layer, using a Multiply-like effect.
Contrast increases: Because Overlay pushes light areas lighter and dark areas darker, it naturally increases contrast without simply making the entire image brighter or darker.
When to Use It
Adding textures: Place a paper, grain, or other texture on an Overlay layer to add visual detail while allowing the underlying colors to show through.
Color retouching and grading: Brush soft colors onto an Overlay layer to introduce a cohesive mood, ambient color, or subtle lighting changes.
Dynamic shading: Paint highlights and shadows on a single Overlay layer for a quick lighting pass that increases contrast.