How to Calculate Commission on Sales: UK Worked Examples

Most guides answer "how do you calculate commission on sales" with one line: rate × revenue. That's step five of eight, and it's the step that almost never goes wrong. The errors live either side of it — in what counts as revenue (VAT, pass-through costs, opt-out clauses) and in what happens after the number is agreed (employer National Insurance, PAYE, employee NIC). If you're the person who has to explain a payslip to a rep or a payroll cost to a CFO, you need the whole ladder.

TL;DR

To calculate commission on sales in the UK, work from the ex-VAT invoice value, strip out anything your plan defines as non-commissionable (pass-through costs, discounts, unconfirmed contract value), apply the commission rate or tier, then treat the result as ordinary earnings. Commission is pay, not a benefit, so it goes through PAYE — it attracts employer National Insurance at 15% on earnings above the £5,000-a-year secondary threshold in 2026/27, plus income tax and employee NIC at 8% (2% above the upper earnings limit) on the rep's side. A £1,350 gross commission costs the employer £1,552.50 and puts roughly £845 in a higher-rate rep's pocket. VAT is never commissionable: it belongs to HMRC, not to the rep or the business.

What are the eight steps in a UK commission calculation?

The calculator above handles the middle of the ladder — quota, rate, accelerator. Here is the full sequence a UK operator actually has to run, including the parts payroll cares about.

Steps 2, 3 and 4 are where the money is lost. Steps 7 and 8 are where the credibility is lost, because a rep who was promised "£1,350 commission" and sees £845 land in their account assumes someone has short-changed them.

Rate × revenue is the easy bit. The expensive mistakes are in defining revenue and in explaining the net.

Is commission calculated before or after VAT?

Commission on sales in the UK is calculated on the ex-VAT (net) value of the sale. VAT charged to a customer is money the business collects for HMRC and hands over on its VAT return — it never belongs to the business, so it can't sensibly form part of a rep's commissionable revenue. To get the ex-VAT figure from a standard-rated invoice, divide by 1.2, as HMRC sets out in its guidance on charging and reclaiming VAT.

This sounds obvious and is still one of the most common spreadsheet errors described by teams migrating off Excel — usually because the CRM stores one number and the accounting system stores another. If your Xero invoice total is the field feeding your commission sheet, you are paying commission on VAT. On a £50,000 net deal at 3%, that's £300 of overpayment per deal, before employer NIC. Our guide on whether to pay commission before or after VAT and refunds goes deeper on the edge cases, including credit notes.

Worked example: a £50,000 SaaS deal

Take an AE on a £45,000 base and £15,000 variable — a £60,000 OTE on a 75/25 split — carrying a £500,000 annual new-business quota. That makes the flat commission rate 3% of commissionable revenue.

The deal: a 12-month contract invoiced at £60,000 including VAT. £5,000 of the net value is a third-party data licence resold at cost, which the plan excludes.

Step	Amount
Invoiced to client (incl. VAT at 20%)	£60,000.00
Less VAT	−£10,000.00
Net revenue	£50,000.00
Less pass-through third-party licence	−£5,000.00
Commissionable value	£45,000.00
Commission at 3%	£1,350.00
Employer NIC at 15%	£202.50
Total cost to the employer	£1,552.50
Income tax and employee NIC on the commission	−£505.40
Increase in the rep's take-home	£844.60

Here's the payroll arithmetic behind those last two lines, using the 2026/27 England, Wales and Northern Ireland figures published in HMRC's rates and thresholds for employers 2026 to 2027. The rep's normal monthly gross is £3,750. In the commission month it's £5,100.

On £5,100, after the £1,048 monthly personal allowance, £3,141.67 falls in the 20% band and £910.33 tips into the 40% band — £992.46 of income tax. Employee NIC is 8% on earnings between the £1,048 primary threshold and the £4,189 upper earnings limit (£251.28), then 2% on the £911 above it (£18.22), giving £269.50. Net pay is £3,838.04 against £2,993.44 in a normal month: an £844.60 uplift on £1,350 gross.

The marginal maths is brutal and worth being straight with reps about. The first £439 or so of that commission is taxed at 28% (20% tax plus 8% NIC). Everything above it is taxed at 42% (40% tax plus 2% NIC), because the higher-rate threshold and the NIC upper earnings limit both bite at around £4,189 a month. The business spends £1,552.50 to deliver £844.60 — the rep keeps 54p of every pound the company pays out.

Worked example: a £15,000 recruitment placement

Recruitment adds two wrinkles: a cost-of-sale threshold and a rebate period.

A consultant on a £30,000 base places a candidate at £75,000 on a 20% fee — £15,000 net, invoiced at £18,000 including VAT. The plan pays 15% of monthly billings above an £8,000 threshold.

• Commissionable billings: £15,000 − £8,000 = £7,000
• Gross commission: 15% × £7,000 = £1,050
• Employer NIC at 15%: £157.50, so total employer cost £1,207.50
• The consultant's monthly gross goes from £2,500 to £3,550. All of the commission stays inside the basic-rate band and below the upper earnings limit, so it's taxed at a flat 28% marginal rate: £756 net

Same structure, very different net efficiency. The basic-rate consultant keeps 72p per gross pound; the higher-rate AE keeps 58p. That gap matters when you're comparing a spiff against a base uplift, or deciding where to put an extra £5,000 of variable budget.

Now the rebate. If the candidate leaves in week six and the client is credited 50%, the fee drops to £7,500 — below the £8,000 threshold, so the whole £1,050 reverses. Within the same tax year, reducing gross pay in a later period lets payroll correct income tax, employee NIC and employer NIC through the normal cumulative mechanism. Across a tax year boundary it gets considerably messier, and as of 10 September 2026 it's worth confirming the treatment with your accountant before you process anything. Our guide to recruitment commission clawbacks and rebate periods covers how to write the clause so you don't need the argument.

What does commission actually cost the employer?

Commission is earnings, not a benefit in kind, so it runs through PAYE in the pay period it's paid — it does not go on a P11D. That means employer (secondary) Class 1 NIC applies at 15% on earnings above the secondary threshold of £5,000 a year, £417 a month, for 2026/27, per HMRC's rates and thresholds for employers. Any rep on a realistic UK base is already past that threshold, so every single pound of commission attracts the full 15%.

Commission budget (gross)	Employer NIC at 15%	True payroll cost
£50,000	£7,500	£57,500
£150,000	£22,500	£172,500
£400,000	£60,000	£460,000

The Employment Allowance can reduce an eligible employer's annual NIC liability by up to £10,500 in 2026/27, according to the same HMRC guidance, but a growing sales org typically exhausts it in the first couple of months of the tax year — so 15% is the right marginal assumption for comp modelling. We've broken down the wider impact in what employer NIC really costs on commission in 2026.

How much tax is deducted from commission in the UK?

Commission is taxed exactly like salary — there is no separate "commission tax rate" and no special code. What makes it feel punitive is lumpiness: a quarterly commission payment stacks on top of that month's salary and pushes a chunk of it into the 40% band, even if the rep's annual earnings sit comfortably in basic rate. Because PAYE is cumulative, that usually washes out over the year; employee NIC, calculated period by period, does not.

Scottish taxpayers hit the pain earlier. HMRC's 2026/27 employer rates show Scotland's 42% higher rate starting at £31,093 of earnings above the PAYE threshold, against £37,701 in the rest of the UK, with a 45% advanced rate and 48% top rate above that. If you run a mixed-location team, two reps on identical plans closing identical deals will take home different amounts — say so in the plan document before someone discovers it on a payslip.

One practical fix: if your plan pays quarterly and your reps complain about tax, paying the same total monthly smooths the higher-rate spike for anyone whose annual earnings don't genuinely reach the higher band. It's not a tax dodge; it's just avoiding an artificial spike. For the full picture, see our guide to how commission is taxed in the UK.

Where commission calculations actually break

In mid-market sales, contract complexity spikes past roughly £100,000. Below that, a closed-won number is usually just a number. Above it, custom clauses, opt-outs, security-review-driven start-date changes and legal redlines appear — and that's exactly where commission errors hide. Comp logic that works fine on a £10,000 SMB deal that closed in 14 days does not survive a £350,000 multi-threaded one.

The defence isn't a cleverer formula. It's two habits. First, the sales manager sanity-checks the calculation against the real contract terms before payroll runs, not after. Second, the rep can see how their number was built at any time. Reps don't lose faith because a number is occasionally wrong — they lose it when they can't see the working and a correction lands with no warning. Visibility and an audit trail prevent more disputes than plan design ever will, which is why commission errors damage trust far out of proportion to their size.

Frequently Asked Questions

How do you calculate commission on sales?

Take the ex-VAT value of the sale, subtract anything your commission plan excludes (pass-through costs, discounts, unconfirmed or opt-out contract value), then multiply by the applicable commission rate or tier. That gives gross commission, which is then subject to employer National Insurance on the business side and income tax plus employee NIC on the rep's side.

Is commission paid on the gross or net sale value?

Commission in the UK is normally paid on the net, ex-VAT value of the sale. Some plans go further and commission on gross margin rather than revenue — common where cost of delivery varies widely between deals — but VAT is excluded either way, because VAT collected from a customer belongs to HMRC.

Does an employer pay National Insurance on sales commission?

Yes. Commission counts as earnings, so employer Class 1 National Insurance applies at 15% for 2026/27 on earnings above the secondary threshold of £5,000 a year, according to HMRC's rates and thresholds for employers. Because most sales salaries already exceed that threshold, effectively all commission attracts the full 15%.

Why does my rep receive so much less than the commission figure I approved?

Because income tax and employee National Insurance come off it. A commission payment landing in a month where total gross pay exceeds roughly £4,189 is taxed at a 42% marginal rate for most UK taxpayers (40% income tax plus 2% NIC), so a £1,350 gross commission can net out at around £845. Publish gross figures and explain the deductions up front rather than letting the payslip do it.

Should commission be calculated on invoiced revenue or cash collected?

Both are defensible, and the right answer depends on your payment risk. Paying on invoice is faster and better for rep motivation; paying on cash collected protects the business from bad debt but delays reward. A common middle path is to pay on invoice with a clawback if the invoice remains unpaid after an agreed period — provided the clawback terms are written into the commission agreement in advance.