Commission is pay calculated as a percentage or fixed amount per sale, transaction or other measurable output, rather than a fixed salary for time worked.
What it means
Because commission earnings can swing significantly from one pay period to the next, taxing each period's commission in isolation at face value would distort the employee's effective tax rate. Payroll typically annualises commission income, the same way it does bonuses, to smooth the PAYE calculation across the year.
Where it fits in
Commission is added to gross remuneration for the period it is paid and flows through the same annualised PAYE treatment as other irregular income. Employees paid wholly or mainly on commission sometimes fall under different rules for allowable deductions on their personal tax return, but the payroll-side PAYE mechanism for withholding remains the standard one.
Key rules
- Fully taxable through PAYE - no exemption for the variable nature of the income.
- Annualised in the same way as bonuses to manage the tax impact of irregular amounts.
- Calculated independently of basic salary, though both are summed into gross remuneration.
- An employee paid mainly on commission may qualify for specific personal expense deductions on assessment, separate from the payroll calculation.
