How Commission is Taxed in the UK: A Sales Leader's Guide

Published 26 November 2025 | Last reviewed 17 June 2026 | The Commit Team specialises in commission automation and UK payroll compliance.

How is sales commission taxed in the UK?

Commission is taxed as employment income through PAYE (Pay As You Earn) and National Insurance contributions, identical to salary. According to HMRC's Income Tax rates for 2026/27, you'll pay 20% Income Tax on commission earnings between £12,571–£50,270, 40% on £50,271–£125,140, and 45% above that. National Insurance adds 8% on earnings up to £50,270, then 2% above, per HMRC's NIC guidance for 2026/27. Employers also pay 15% NI on commission above £5,000 annually (the secondary threshold for 2026/27, reduced from £9,100 following the April 2026 Budget change). A sales rep earning £45,000 base + £8,000 commission will take home approximately £4,920 from that commission after tax and NICs—a 61.5% net rate because the commission pushes them into the higher-rate band. Commission is reported to HMRC via Real Time Information (RTI) alongside salary, with no separate tax category or preferential treatment.

If you're running a UK sales team, you need to understand how sales commission PAYE and commission National Insurance work. Not because you're doing the payroll yourself, but because your reps will ask questions, finance will raise concerns, and getting it wrong creates problems that compound quickly.

TL;DR

Commission tax UK regulations treat commission as employment income subject to PAYE (Income Tax) and National Insurance contributions. According to HMRC rates for 2026/27, amounts vary by tax band: 20% basic rate (£12,571–£50,270), 40% higher rate (£50,271–£125,140), 45% additional rate (above £125,140). Employee NICs are 8% up to £50,270, then 2% above, per HMRC NIC thresholds. Employer NICs add 15% to gross commission costs on earnings above the secondary threshold (£5,000 for 2026/27, down from £9,100 due to April 2026 changes). PAYE is calculated cumulatively across the tax year, so uneven monthly commission creates variable tax months that can confuse reps. Reps should expect to take home 55–70% of gross commission, depending on their tax band. Commission must be reported through Real Time Information (RTI) submissions alongside regular salary. A worked example: a rep on £45,000 base earning £8,000 commission will pay £1,092 Income Tax (40% on the £2,730 above £50,270) plus £3,070.60 total employee NICs, netting £4,920 from the £8,000 gross commission (61.5% take-home). The employer's true cost is £9,200 once the 15% employer NIC on commission is added.

Frequently Asked Questions

Is commission taxed at 40% in the UK?

Commission is taxed at your marginal Income Tax rate—20% basic, 40% higher, or 45% additional—plus National Insurance. A rep earning £45k base + £8k commission pays 40% tax on earnings above £50,270 (the higher-rate threshold), not on the entire commission amount. The effective rate depends on where commission sits in your total income stack. In the example above, only £2,730 of the £8,000 commission faces 40% tax; the rest is taxed at 20%. Combined with NICs, the overall deduction is approximately 38.5% of gross commission, not a flat 40%.

What's the difference between bonus tax and commission tax in the UK?

There is no difference. HMRC treats both bonuses and commission as employment income subject to PAYE and National Insurance. The tax calculation is identical—both are aggregated with salary and taxed cumulatively across the tax year. Any perceived difference comes from timing (bonuses often paid annually, commission monthly) rather than tax treatment. Whether you call it a bonus, commission, or incentive payment, HMRC sees it as earnings and taxes it the same way.

How does commission appear on my P60?

Commission is not shown as a separate line on your P60. HMRC's P60 format aggregates all employment income—salary, commission, bonuses—into a single 'Total pay' figure. Your payslips will itemise commission payments month by month, but the P60 year-end summary rolls everything into gross pay and total deductions. If you need a commission breakdown for mortgage applications or tax planning, request a detailed payslip history from your employer rather than relying on the P60.

Why does my commission payment look smaller than expected?

Commission is subject to Income Tax and National Insurance deductions through PAYE, just like salary. A rep in the higher-rate tax band (40%) will also pay 2% NI on earnings above £50,270, meaning a £2,000 commission payment nets approximately £1,160 after deductions. The tax is calculated cumulatively across the year, so months with larger commission payments catch up on any underpayment from lower-earning months. This cumulative PAYE calculation can make high-commission months feel heavily taxed, even though the annual tax liability evens out by April.

How does commission affect my tax band?

Commission stacks on top of your base salary when calculating your tax band. If your base salary is £45,000 and you earn £8,000 in commission, your total income of £53,000 pushes you into the higher-rate band. The portion above £50,270 is taxed at 40% rather than 20%, which is why commission payments can feel heavily taxed when they push you over a threshold. For more on structuring commission to manage tax-band impacts, see our guide to sales commission plan design in the UK.

Is commission reported to HMRC separately from salary?

No, commission is reported alongside salary as employment income through Real Time Information (RTI) submissions. Your employer submits payroll data to HMRC every time they run payroll, including commission payments. HMRC treats commission as earnings, not as a separate category, so it appears on your P60 and payslips as part of your total taxable income.

What's the difference between employer and employee NI on commission?

Employees pay 8% National Insurance on commission earnings between £12,570 and £50,270, and 2% on amounts above that. Employers pay 15% NI on all commission above the secondary threshold (£5,000 for 2026/27, reduced from £9,100 in the April 2026 Budget). This means a £10,000 commission payout now costs the company £11,750 once employer NICs are included—a cost often overlooked when budgeting commission spend. The April 2026 threshold drop significantly increased employer NIC liability on commission; finance teams budgeting on old £9,100 thresholds will see higher-than-expected payroll bills.

Why Is Commission Classed as Employment Income?

Commission payments to UK employees are subject to both Income Tax and National Insurance contributions, deducted at source through PAYE. Under UK tax law, commission paid to employees is treated as employment income with no special category or separate treatment. As far as HMRC is concerned, commission is earnings — the same as salary, wages, or overtime pay.

Your payroll system handles sales commission PAYE deductions automatically, but the mechanics matter when reps start asking why their commission payment looks smaller than expected.

HMRC's Employment Income Manual (EIM00500) classifies all payments made in connection with employment—including commission, bonuses, and incentive payments—as taxable earnings with no carve-out for variable pay or performance incentives. This classification means every pound of commission faces the same tax treatment as regular salary, regardless of how you structure your commission plan design.

How Does PAYE Calculate Tax on Commission?

PAYE (Pay As You Earn) is HMRC's system for collecting tax from employment income before it reaches the employee. Your employer deducts Income Tax and National Insurance from each payment, then sends it to HMRC on your behalf.

For regular salary, this is straightforward. The same amount hits payroll each month, taxed at a consistent rate. Commission complicates things because the amounts vary.

When commission is paid alongside regular salary, your payroll software calculates the total payment and applies tax based on the employee's tax code. The tax code determines how much of their earnings fall into each band.

According to GOV.UK Income Tax rates for 2026/27, HMRC sets the Income Tax bands for the 2026/27 tax year in England, Wales, and Northern Ireland as follows:

• Personal Allowance: £0 - £12,570 (0% tax)
• Basic Rate: £12,571 - £50,270 (20% tax)
• Higher Rate: £50,271 - £125,140 (40% tax)
• Additional Rate: Over £125,140 (45% tax)

Commission earnings stack on top of base salary when HMRC calculates your tax band. A sales rep earning £60,000 total (£45,000 base + £15,000 commission) will pay 40% tax on the £9,730 above the higher-rate threshold of £50,270, reducing their net commission by approximately £3,892 compared to basic-rate taxation. This band-crossing effect is why commission payments can feel heavily taxed when they push you over a threshold.

Worked Example: £45k Base + £8k Commission

Let's walk through the full PAYE calculation for a typical UK sales rep:

Income:

• Base salary: £45,000
• Annual commission: £8,000
• Total income: £53,000

Income Tax (per HMRC bands):

• £0 on first £12,570 (Personal Allowance)
• £7,540 on £12,571–£50,270 (20% of £37,700)
• £1,092 on £50,271–£53,000 (40% of £2,730)
• Total Income Tax: £8,632

Employee National Insurance (per HMRC NIC rates):

• £3,016 on £12,571–£50,270 (8% of £37,700)
• £54.60 on £50,271–£53,000 (2% of £2,730)
• Total employee NICs: £3,070.60

Net take-home:

• £53,000 - £8,632 - £3,070.60 = £41,297.40 annually (£3,441.45/month)

Commission net:

• The £8,000 commission contributed £1,092 Income Tax + £870.60 NICs (approx) = £6,037.40 additional net vs base-salary-only scenario
• Or viewed another way: the rep takes home roughly £4,920 from £8,000 gross commission (61.5% net rate)

Employer cost:

• Employer NICs at 15% on commission above £5,000 threshold = 15% × £3,000 = £450
• True employer cost of £8,000 commission payout = £8,450 once employer NICs are included

This is where reps often feel the sting. A £2,000 commission payment doesn't mean £2,000 in their pocket. After Income Tax and National Insurance, they might take home £1,200 or less — particularly if that payment tips them into a higher band.

How Does Commission Affect Your Personal Allowance?

HMRC sets the Personal Allowance at £12,570 for the 2026/27 tax year—the amount you can earn tax-free each year. Commission counts towards this allowance alongside your salary.

For most reps, the Personal Allowance is fully used by their base salary. If you're earning £30,000 base, you've already exhausted £17,430 of taxable income beyond the allowance, so every pound of commission is taxed at the basic rate (20%) or higher.

But if your total income exceeds £100,000, commission can erode your Personal Allowance further. According to HMRC's tax calculation rules, the Personal Allowance reduces by £1 for every £2 earned above £100,000, which means high earners can lose the allowance entirely. Commission payments that push you over this threshold trigger marginal tax rates as high as 60% on the affected band.

This particularly affects senior AEs and sales leaders with high OTE structures. A £120,000 base plus £20,000 commission doesn't just get taxed at 40% — the portion between £100,000 and £125,140 faces effective marginal rates well above that due to allowance tapering.

National Insurance on Commission

According to HMRC's National Insurance rates and thresholds for 2026/27, commission National Insurance contributions (NICs) apply to commission payments just like salary. HMRC sets employee NICs at 8% on earnings between £12,570 and £50,270 (the primary threshold and upper earnings limit), then 2% on anything above.

Employers also pay NICs on commission — HMRC mandates 15% on all earnings above the secondary threshold (£5,000 for 2026/27, reduced from £9,100 following the April 2026 Budget). This is often forgotten when budgeting for commission costs. A £10,000 commission payout now costs the company £11,750 once employer NICs are factored in—a significant jump from the previous £11,135 cost under the old £9,100 threshold.

Unlike Income Tax, National Insurance doesn't taper at high earnings — HMRC's 2% rate on amounts above £50,270 continues indefinitely. This means even additional-rate taxpayers continue paying NICs on every pound of commission. For how NICs interact with pension contributions on commission earnings, see our guide to commission and workplace pensions.

The Month-to-Month Problem

Commission payments rarely arrive evenly across the year. A rep might earn £500 in commission one month and £5,000 the next. Using HMRC's cumulative PAYE calculation method, tax is calculated on a cumulative basis across the tax year — but it can create cash flow surprises for employees.

Here's how HMRC's system works: PAYE calculates tax cumulatively. If a rep has a low-commission month, they might pay less tax than expected (because their cumulative earnings suggest a lower annual total). When a big commission month arrives, the tax calculation catches up, and they pay more.

This isn't an error. It's how HMRC's system ensures the right amount of tax is paid by year end. But it confuses reps who expect commission to be taxed at a flat rate—a confusion that often triggers commission disputes between reps and finance teams.

Some payroll systems offer the option to tax irregular payments on a non-cumulative basis (Week 1 / Month 1 basis), which applies a flat rate to each payment. This smooths month-to-month variation but can lead to over- or underpayment across the year, requiring adjustment via self-assessment.

For sales leaders, the lesson is simple: educate your reps early. A rep who understands cumulative PAYE won't panic when a £3,000 commission payment nets £1,700 after tax.

What Gets Reported to HMRC

Every time you run payroll, your payroll software submits a Full Payment Submission (FPS) to HMRC via Real Time Information (RTI). According to HMRC's RTI guidance, this includes all earnings — salary, commission, bonuses, benefits — along with the tax and NICs deducted.

Commission isn't reported separately. It's aggregated with salary as total pay for the period. HMRC doesn't distinguish between £2,000 base + £1,000 commission and £3,000 salary — both show as £3,000 earnings on the FPS.

This matters for year-end reporting. Your P60 (the annual summary given to employees) shows total pay and total deductions. Reps sometimes expect commission to appear as a line item; it doesn't. Everything rolls into gross pay.

If you're using commission software like Commit, the integration with Xero ensures commission calculations feed directly into payroll without manual re-entry. The FPS goes to HMRC with the correct figures, and your audit trail is complete. For how commission interacts with benefits reporting, see our guide to commission and P11D compliance.

Clawbacks and Tax Refunds

Clawbacks — where commission is reclaimed after a deal falls through or a customer churns — create tax complications under HMRC rules. If a rep was paid £2,000 commission in March, taxed on it, then had to repay it in June, they've overpaid tax.

HMRC allows employers to adjust for clawbacks in the same tax year via negative pay entries on the FPS. The payroll system reduces the employee's cumulative pay figure, which triggers a refund of the excess tax through subsequent payslips.

But if the clawback happens in a different tax year, the process is messier. According to HMRC guidance, the employee needs to reclaim the overpaid tax via self-assessment or a P87 form, which can take months.

For sales leaders, the lesson: avoid clawback structures that span tax years. If you must claw back commission, do it within the same April–April window to keep tax adjustments in-year and compliant with HMRC procedures. For how clawbacks interact with other employment rights, see our articles on commission during notice periods and commission on maternity leave.

How Commission Interacts with Holiday Pay and Statutory Leave

Commission also affects holiday pay calculations under the Working Time Regulations 1998. According to the 2022 Harpur Trust ruling, employers must include an average of commission earnings when calculating holiday pay for the 52 weeks preceding leave (or the period of employment if shorter).

This means a rep earning variable commission will receive more than their base salary during annual leave—payroll must calculate a 'reference period' average that includes commission. The tax treatment remains identical (PAYE + NICs), but the gross amount changes. For full detail, see our guide to commission and holiday pay in the UK.

What This Means for Comp Planning

When designing commission plans, remember that reps care about take-home pay, not gross. A £60,000 OTE sounds good until the rep realises £20,000 of variable comp nets £12,000 after HMRC deductions for tax and NICs.

If you're comparing your plan to competitors, adjust for tax. A competitor offering £70,000 base + £10,000 commission might deliver less take-home than your £65,000 + £15,000 structure, depending on how each pushes the rep through HMRC's tax bands.

According to HMRC's National Insurance guidance for employers, Employer NICs also matter for budget planning. If you're allocating £500k to commission payouts, the true cost is closer to £575k once Employer NICs are included—and that's using the new £5,000 secondary threshold introduced in April 2026. Finance teams that miss this get a surprise when payroll bills arrive.

For more on aligning commission structures with UK tax realities, see our guide to sales compensation planning. For how commission integrates with pension auto-enrolment, see commission and pensions. And for how FRS 102 accounting standards affect commission accruals and reporting, see our commission accounting guide.