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

Commission taxation catches many sales leaders off guard. Unlike bonus schemes with predictable annual payouts, commission hits payroll monthly — sometimes weekly — and HMRC treats it differently than you might expect.

If you're running a UK sales team, you need to understand how commission is taxed. 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.

Commission is Employment Income

Under UK tax law, commission paid to employees is treated as employment income. There's no special category, no separate treatment. As far as HMRC is concerned, commission is earnings — the same as salary, wages, or overtime pay.

This means commission is subject to both Income Tax and National Insurance contributions, deducted at source through PAYE. Your payroll system handles this automatically, but the mechanics matter when reps start asking why their commission payment looks smaller than expected.

The HMRC Employment Income Manual is explicit on this point: any payment made in connection with employment — including commission, bonuses, and incentive payments — constitutes taxable earnings.

How PAYE Works 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.

For the 2025/26 tax year, the Income Tax bands in England, Wales, and Northern Ireland are:

• 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. If a rep earns £45,000 base and receives £8,000 in commission, their total income of £53,000 pushes them into the higher rate band. The portion above £50,270 gets taxed at 40% rather than 20%.

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.

National Insurance on Commission

National Insurance contributions (NICs) apply to commission payments just like salary. For the 2025/26 tax year, employees pay 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 — currently 15% on all earnings above the secondary threshold. This is often forgotten when budgeting for commission costs. A £10,000 commission payout costs the company £11,500 once employer NICs are factored in.

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. PAYE handles this through cumulative tax calculations — but it can create cash flow surprises for employees.

Here's how it works: PAYE calculates tax on a cumulative basis across the tax year. 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 the 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.

Some payroll systems offer the option to tax irregular payments on a "week 1" or "month 1" basis — treating each payment in isolation rather than cumulatively. This creates more predictable deductions but can result in under- or over-payment of tax across the year. Most employers stick with cumulative taxation.

What Reps Actually Take Home

A worked example helps illustrate the impact.

Consider a sales rep earning £40,000 base salary. In a given month, they close a large deal and earn £4,000 in commission.

Their base salary has already used their Personal Allowance and taken them into the basic rate band. The £4,000 commission is taxed as follows:

• Income Tax (20% basic rate): £800
• Employee NICs (8%): £320
• Take-home from commission: £2,880

That's 72% of the gross commission. Not bad, but noticeably less than £4,000.

Now consider a senior rep earning £55,000 base — already into the higher rate band. Their £4,000 commission faces:

• Income Tax (40% higher rate): £1,600
• Employee NICs (2% above upper earnings limit): £80
• Take-home from commission: £2,320

That's 58% of the gross. The higher earner takes home significantly less of each commission pound.

This is why reps sometimes feel commission "isn't worth it" as their base salary increases. The maths changes at different income levels.

Timing and Cash Flow

Commission timing affects both the rep and the company.

For reps, commission paid in a single large lump might push them temporarily into a higher tax band. If the same total were spread across multiple months, each payment might stay within the basic rate. The annual tax liability ends up the same, but the month-to-month experience differs.

For companies, commission payments need to be processed through payroll before they can be paid. This means commission earned at month end might not be paid until the following pay cycle — a delay that frustrates reps who've already counted the money.

Clear communication about commission payment dates — when deals are recognised, when commission is calculated, when it hits payroll — reduces friction significantly.

Reporting and Compliance

Commission must be reported to HMRC through Real Time Information (RTI) submissions, just like regular salary. Each time you run payroll, your software reports the payment to HMRC, including any commission amounts.

There's no separate reporting requirement for commission. It's bundled with other earnings on the employee's payslip and in your RTI submission. But your payroll records should clearly distinguish commission from base salary — both for audit purposes and to help reps understand their statements.

At year end, commission appears on the employee's P60 as part of their total pay. If they need to complete a Self Assessment return (for example, if they have other income sources), the commission is already included in their PAYE earnings figure.

Common Questions From Reps

"Why was my commission taxed at 40%?"

Because your total earnings for the year (or projected earnings, if using cumulative PAYE) put you into the higher rate band. Commission is added to your base salary, and the portion that exceeds £50,270 is taxed at 40%.

"Can I receive commission as a bonus to pay less tax?"

No. Bonuses and commission are both treated as employment income. The tax treatment is identical.

"What if I'm paid commission-only?"

The same rules apply. Your commission is taxed through PAYE based on your tax code and total earnings. You'll still get a Personal Allowance (assuming you're not earning above £125,140).

"Why does my commission look different month to month?"

PAYE calculates tax cumulatively. In months where your total earnings are lower, you might pay less tax. In high-commission months, the calculation catches up. By year end, you'll have paid the correct amount.

Getting It Right

Commission taxation isn't complicated once you understand the mechanics. Commission is earnings. Earnings are taxed through PAYE. The amount of tax depends on the employee's total income and which tax bands they fall into.

The problems arise when this isn't communicated clearly. Reps who don't understand why their commission payment shrank by 40% lose trust in the system. Finance teams who forget to budget for employer NICs on commission costs get unpleasant surprises.

Commission management software like Commit helps by showing reps their gross and estimated net commission in real time — before payroll runs. When there are no surprises on payday, there are fewer questions to answer.

For everything else, the GOV.UK guidance on Income Tax rates and employer PAYE responsibilities are the authoritative sources. When in doubt, consult an accountant — tax advice isn't something to wing.