Tax on Commission and Variable Pay in the UK: How PAYE Handles Irregular Income
Commission payments, performance bonuses, and other variable pay are all taxable income in the UK, subject to Income Tax and National Insurance in the same way as your regular salary. However, because commission and bonuses are irregular — paid in lumps rather than evenly across the year — the PAYE system can sometimes produce apparently counterintuitive deductions in the month they are paid. This guide explains the mechanics and how to ensure your tax position is correct.
Are commissions taxable?
Yes, without exception. Commission payments are employment income and are subject to:
- Income Tax at your marginal rate (20%, 40%, or 45%).
- Employee National Insurance (8% on earnings to £50,270, 2% above).
There is no tax exemption for commission, no threshold below which small commissions are tax-free (beyond the general Personal Allowance), and no special rates. Commission is treated identically to salary.
The cumulative PAYE basis
The PAYE system is designed to collect the right total tax across the full tax year, not necessarily the "right" amount in each individual pay period. It does this using a cumulative calculation. Each payday, your employer calculates:
- Total income earned from 6 April to the current date.
- Total tax due on that cumulative income (using your tax code).
- Tax already deducted in previous payslips.
- Tax to deduct this period = (2) minus (3).
This means a large commission payment in October will cause a large deduction in October, but subsequent payslips in November through March will show lower deductions than usual, as the cumulative calculation catches up. Over the full year, the total tax deducted should be correct.
Why commission sometimes triggers "emergency tax"
Emergency tax typically arises when a commission is processed outside the normal payroll cycle — for example, via a one-off BACS payment or a separate payroll run rather than being included in the regular monthly payroll. If the payment is processed on a Week 1 or Month 1 basis (non-cumulative), the tax is calculated as if this is your only income for the period, without looking at the year-to-date position. This can result in significant overtaxation if the commission is large.
The solution is to ensure your employer processes commission through the same cumulative payroll as your regular salary. If that is not possible and you have been overtaxed, the cumulative calculation on subsequent payslips will correct it — or you can claim a refund after the tax year ends via a P800 or Self Assessment.
Commission that crosses the higher rate threshold
If your base salary is £45,000 and you receive a £10,000 commission, your total earnings for the year are £55,000. The £4,730 between £50,270 and £55,000 will be taxed at 40%. The cumulative PAYE system handles this automatically — it does not require you to do anything differently. However, many employees are surprised when their commission "net" is much less than expected because of the higher rate applying to part of it.
Can pension contributions reduce the tax on commission?
Yes. If your employer allows you to make pension contributions via salary sacrifice, you can sometimes direct all or part of a commission payment into your pension. This is not always available — it depends on your employer's payroll systems and scheme rules. But where it is available, diverting commission into a pension saves Income Tax (20–45%) and NI (8% or 2%) on the amount contributed. For a higher rate taxpayer, a £10,000 commission contribution to pension instead of salary saves approximately £4,200 in combined tax and NI.
Frequently asked questions
My employer paid my commission two months after it was earned. Which tax year does it fall in?
Commission is taxable in the tax year it is paid, not the year it was earned. If you earned a commission in March 2026 but it was not paid until April 2026, it falls in the 2026-27 tax year. This can matter if you are close to a tax threshold — for instance, if receiving it in the later year keeps you below the higher rate threshold, or if you have unused pension carry-forward allowance to absorb a large payment. Discuss the timing with your payroll department if this is relevant.
Does commission count toward my annual pension allowance?
Yes. Your annual pension contribution limit (£60,000 for 2025-26, or 100% of earnings if lower) is based on your total UK earnings in the year, which includes commission and all other employment income. A large commission payment in a year can increase your permissible pension contributions — which is useful if you want to make a larger pension contribution in that year to offset the higher tax liability.