How IR35 Reshapes Contract Recruitment Commission Margins

If you run a contract desk, IR35 doesn't change how you pay commission — it changes what you're paying commission on. The mechanics (rate cards, thresholds, tiers, clawback windows) work exactly the same inside or outside the off-payroll rules. What changes is the margin number that feeds into them, because when your agency becomes the fee-payer on an inside-IR35 engagement, employer's NIC and the Apprenticeship Levy (where applicable) have to come out of someone's pocket — and unless your contract was carefully written, that someone is you.

This is a sourcing-and-margin problem dressed up as a tax problem. Treat it that way.

TL;DR

• Inside IR35: where the agency is the deemed employer/fee-payer, it must deduct PAYE and employee NICs from the fee paid to the worker's PSC and pay employer NICs and Apprenticeship Levy itself (HMRC guidance). Those employer costs erode the agency's gross margin.
• Outside IR35: the agency pays the PSC gross; the PSC handles its own tax. Margin is the simple difference between client charge and contractor pay.
• Commission impact: if your plan pays a percentage of "gross margin" without defining whether employer NIC sits above or below the line, inside-IR35 deals can overpay consultants on margin the agency never actually keeps.
• The fix: define the commissionable margin explicitly, tag each placement with its IR35 status in your commission system, and reconcile against payroll — not against the invoice value.

What does IR35 actually do to a contract placement?

The off-payroll working rules (IR35) exist to make sure a contractor working through a personal service company (PSC) pays broadly the same Income Tax and NICs as an employee would, where the underlying relationship looks like employment. HMRC's guidance is clear that the rules apply when a worker would have been an employee if engaged directly by the client (gov.uk).

Where it matters for your commission plan is the contractual chain:

• For public sector clients and medium/large private-sector clients, the end client decides employment status for tax and issues a Status Determination Statement (SDS) to both the worker and the agency they contract with. The SDS must be passed down the chain to the party immediately above the PSC — the fee-payer (HMRC: deemed employer responsibilities).
• For small private-sector clients, the worker's intermediary (the PSC) remains responsible for assessing IR35 itself under the original Chapter 8 rules (gov.uk). The agency is not the deemed employer.

In most contract recruitment chains, the agency is the party immediately above the PSC and therefore becomes the fee-payer/deemed employer when an engagement is determined inside IR35. HMRC's agency guidance spells this out: the deemed employer is responsible for deducting Income Tax and employee NICs and paying employer NICs to HMRC (gov.uk).

Why does this matter for commission rather than payroll?

Because your contract recruiters are almost certainly paid on a percentage of gross margin — the spread between what the client pays and what the contractor takes. The moment IR35 forces the agency to layer employer NIC and Apprenticeship Levy (if your pay bill exceeds the threshold) on top of the contractor's deemed earnings, the agency's real retained margin shrinks even though the invoice-level margin looks identical.

IR35 doesn't reach into your commission plan. It reaches into the margin the plan multiplies.

HMRC's technical guidance is explicit on the consequence: where the rules apply, the fee-payer becomes liable for secondary Class 1 NICs and "cannot lawfully deduct the secondary NICs from a fee that has been agreed" — they can only renegotiate the rate going forward (HMRC technical note). So if your existing contracts were priced before an inside-IR35 determination, the employer NIC bill lands on the agency by default.

If your commission plan ignores this, you end up paying a consultant 10% of a margin number that has already been quietly eaten by NIC.

Outside IR35 vs inside IR35: what changes for the agency

Element	Outside IR35 / small client	Inside IR35 (agency is fee-payer)
Who determines status	Worker's PSC	Medium/large or public-sector client (SDS)
Who pays the PSC	Agency pays PSC gross	Agency pays PSC net of PAYE and employee NIC
Employer NIC	Borne by PSC on director salary	Borne by agency on deemed direct payment
Apprenticeship Levy	Not triggered by this engagement	Agency pays if its annual pay bill exceeds the £3m threshold
Payroll burden	Invoice in, invoice out	Operate PAYE on deemed employer basis with RTI reporting and off-payroll worker indicator
Realised margin	Invoice margin = retained margin	Retained margin = invoice margin − employer NIC − Apprenticeship Levy (where applicable)

Sources: HMRC off-payroll for agencies and deemed employer responsibilities.

A worked example: the same placement, two outcomes

Take a contract placement with these economics:

• Client charge: £600/day
• Contractor (via PSC) pay: £500/day
• Invoice-level gross margin: £100/day
• Consultant commission: 20% of gross margin
• Placement length: 220 working days

Outside IR35. The agency pays the PSC £500/day gross. The PSC handles its own tax. Retained margin is £100/day × 220 = £22,000. Consultant commission at 20% = £4,400. The agency keeps £17,600.

Inside IR35. Same numbers on the invoice, but the agency is now the fee-payer. It must deduct PAYE and employee NIC from the £500/day before paying the PSC, and it must pay employer NIC on the deemed direct payment. Treat employer NIC as illustrative — the exact rate depends on the secondary threshold and current rate in force; HMRC sets out the deemed-direct-payment calculation in its deemed employer responsibilities guidance. Assume an effective employer NIC cost of roughly £55/day on the deemed earnings.

• Retained margin: (£600 − £500 − £55) × 220 = £9,900
• Commission paid on invoice margin (the spreadsheet default): 20% × £22,000 = £4,400
• Commission paid on retained margin (correct base): 20% × £9,900 = £1,980

If your plan silently uses the invoice number, you've just paid the consultant 44% of the agency's actual retained margin on that desk. Across a portfolio of inside-IR35 placements, that's the kind of structural overpayment that doesn't show up until year-end reconciliation — by which point it's been baked into payslips and trust.

The right move is rarely to cut commission rates after the fact. It's to define the commissionable margin properly upfront, so the same rate produces the right number whatever the IR35 status. Our contract recruitment commission margin guide covers the mechanics of how to define that base.

Who is the fee-payer in your chain?

This is where overconfident plan design goes wrong. The fee-payer is the party in the chain immediately above the worker's PSC who is a "qualifying person" (HMRC ESM10017). In a simple chain — client → agency → PSC — that's the agency. But the moment another intermediary appears (a master vendor, an MSP, an umbrella, an offshore agency), the fee-payer may shift up or down. If the party directly above the PSC isn't a qualifying person, the obligation moves to the next qualifying party in the chain.

Practical implications for commission ops:

• Tag every contract record with the chain structure and the fee-payer at point of placement.
• If an upstream agency is the fee-payer, your agency is not bearing employer NIC on that placement, and the inside-IR35 hit to margin doesn't apply. Don't penalise the consultant for IR35 on deals where it isn't yours to absorb.
• If a contractor moves from their own PSC to a PAYE umbrella mid-engagement, the off-payroll rules generally fall away (HMRC) — but your margin profile changes again. Make sure your plan handles the switch cleanly.

How should a contract commission plan handle IR35?

For the wider context of how contract desks fit into a recruitment commission plan, see our pillar piece on recruitment agency commission plans in the UK.

Frequently Asked Questions

Does IR35 change the commission percentage we should pay contract recruiters?

Not directly. The off-payroll rules don't dictate commission rates. What they do is change the margin number that sits underneath the rate. If your commissionable margin is defined as net of employer NIC and Apprenticeship Levy, the same percentage produces the right payout on both inside- and outside-IR35 placements without needing two rate cards.

Who is the fee-payer when our agency supplies a contractor through their PSC?

In a simple chain of client → agency → PSC, the agency is the fee-payer because it sits immediately above the PSC and (usually) qualifies as a "qualifying person" under HMRC ESM10017. If there is another agency or intermediary between you and the PSC, the fee-payer may be a different party in the chain. Map each placement individually.

Can we deduct employer NIC from the contractor's day rate to protect margin?

Not from a fee that has already been agreed. HMRC's technical note is explicit that secondary NICs cannot lawfully be deducted from an agreed fee (gov.uk). You can renegotiate the day rate at renewal or for new contracts, but you cannot retrospectively net the cost out of an existing arrangement.

Do the rules apply if our client is small?

No — where the end client is a small private-sector business, the responsibility for assessing IR35 stays with the worker's PSC under the original Chapter 8 rules (gov.uk). Your agency is not the deemed employer in that scenario, so the inside/outside margin distinction in this article doesn't apply. Confirm the client's size — HMRC defines medium/large by turnover, balance sheet and employee thresholds — before assuming.

What about umbrella workers — does any of this apply to them?

Generally no. HMRC's guidance notes that the off-payroll working rules are unlikely to apply where the worker is employed by an umbrella company (gov.uk), because the umbrella is already operating PAYE. The margin maths is different again — the umbrella's costs come out of the rate before it reaches the worker — but it is not an IR35 issue. Tag umbrella placements separately in your commission system.