How to Calculate Sales Commission Formula (UK Guide 2026)

Sales commission basics: what you need to know

Before we dive into formulas, let’s establish the foundation. Sales commission is variable pay that rewards you for generating revenue, hitting targets, or delivering profit. Unlike bonuses (which are discretionary), commission is typically contractual and formula-based.

The three components of commission-based pay

1. Base salary: Your guaranteed annual pay (e.g., £25,000)
2. Commission: Variable earnings based on sales performance
3. OTE (On-Target Earnings): Base + expected commission at 100% target (e.g., £25k base + £15k commission = £40k OTE)

Common commission payment cycles in the UK

Payment cycle	How it works	Common in
Monthly	Commission paid the month after sales close	SaaS, B2B sales, retail management
Quarterly	Commission accumulated and paid every 3 months	Insurance, property, enterprise sales
On completion	Paid when the contract is signed or delivered	Real estate, recruitment, consultancy
Deferred	Paid after client payment received (net 30/60 days)	B2B services, agencies

Understanding your payment cycle matters because it affects cash flow. A £5,000 commission earned in January might not hit your bank until March if your employer operates a deferred payment system.

Flat rate commission (simplest structure)

Flat rate is the most straightforward commission structure. You earn a fixed percentage of every sale, regardless of volume. This is common in retail, estate agency, and recruitment.

When flat rate commission works best

• Consistent product pricing: All sales have similar value
• Transactional sales: High volume, low complexity
• Team selling: Multiple people contribute to each sale
• New sales roles: Simple to understand and easy to forecast

Flat rate variations in the UK

• Split commission: Different rates for new vs existing customers (e.g., 5% new, 2% renewal)
• Product-specific: Higher rates on high-margin products (e.g., 4% on laptops, 6% on warranties)
• Team override: Managers earn 1–2% on team sales on top of their own commission

Tiered commission (accelerating rates)

Tiered commission increases your rate as you sell more. This structure rewards high performers and motivates reps to exceed targets rather than coasting once they’ve hit quota.

Example tiered structure

Sales tier	Commission rate	What it means
£0 – £20,000	4%	First £20k earns 4%
£20,001 – £40,000	6%	Next £20k earns 6%
£40,001+	8%	Everything above £40k earns 8%

Cumulative vs stepped tiered commission

Two ways to structure tiers:

• Cumulative (UK standard): Each tier applies only to sales within that band. The example above uses cumulative—you don’t lose lower-tier earnings when you move up.
• Stepped (less common): Your entire sales value gets the higher rate once you cross the threshold. E.g., if you sell £41,000, all £41,000 earns 8%, not just the amount over £40k. This creates “cliff effects” and is rare in the UK due to fairness concerns.

Threshold commission (must hit target first)

Threshold commission (also called “gate” or “quota” commission) only kicks in once you’ve hit a minimum target. Sell below the threshold? You earn zero commission, even if you came close.

Example threshold structure

Monthly target: £25,000
Commission rate: 7% on sales above target

Why employers use threshold commission

• Cost control: Only pays commission when targets are met
• Performance focus: Incentivises reps to push for quota rather than coast
• Team alignment: Ensures everyone pulls their weight
• Profitability link: Sales below threshold may not cover costs

Gross margin commission (profit-based)

Gross margin commission pays you based on profit, not revenue. This aligns your incentives with the company’s: high revenue means nothing if the deal loses money.

What counts as “direct costs”?

Direct costs vary by industry but typically include:

• Product cost: What the company paid for the goods
• Delivery/shipping: Physical logistics
• Installation: Setup or implementation services
• Third-party fees: Payment processing, licensing

Direct costs exclude overhead like rent, salaries (except where directly attributable), marketing, and general admin.

Why margin-based commission matters

Gross margin commission prevents the “race to the bottom” where salespeople offer heavy discounts to close deals. If your commission is based on revenue, you might sell at a loss to hit targets. Margin-based structures align your interest with profitability.

Understanding OTE (On-Target Earnings)

OTE appears in almost every UK sales job advert, but it’s commonly misunderstood. Let’s clarify exactly what it means and how to evaluate whether an OTE figure is realistic.

What OTE means in the UK

OTE = Base Salary + Commission at 100% Quota

If a job advertises “£45,000 OTE,” that typically means:

• Base salary: £25,000–£30,000
• Commission at target: £15,000–£20,000
• Total OTE: £45,000

The split varies by role and industry, but common UK splits are:

Split ratio	Typical roles	Risk level
70/30 (base/commission)	Account management, customer success	Low risk, stable income
60/40	Inside sales, SDR/BDR roles	Moderate risk, achievable targets
50/50	Field sales, account executives	Higher risk, higher reward potential
40/60	Hunter roles, new business development	High risk, significant earning potential

Use the Take-Home Tax Calculator to see your actual monthly income at different OTE achievement levels.

Tax and National Insurance on commission (UK 2025/26)

Commission is taxable income. Many salespeople are surprised by how much commission shrinks after deductions, especially if they hit a big month that pushes them into the higher-rate tax band.

How commission is taxed in the UK

Commission is added to your regular salary and taxed using PAYE (Pay As You Earn), just like your base pay. This means:

• Income Tax: 20% (basic rate) or 40% (higher rate) or 45% (additional rate)
• National Insurance: 12% on earnings £12,570–£50,270, then 2% above
• Student loans: 9% on earnings above threshold (if applicable)
• Pension: Usually 5% employee + 3% employer (unless opt-out)

The “big month” tax trap

If you earn a large commission in one month, you might temporarily cross into the 40% tax bracket. HMRC’s PAYE system assumes this is your new monthly salary and over-taxes you.

Real UK commission calculation examples

Let’s walk through four complete scenarios showing different industries, structures, and how to calculate both gross commission and take-home pay.

Common commission calculation mistakes (and how to avoid them)

1. Not understanding your structure

Mistake: Assuming flat rate when you actually have tiered commission.
Fix: Request a written explanation of your commission plan with worked examples from HR.

2. Forgetting about tax

Mistake: Budgeting based on gross commission rather than take-home.
Fix: Subtract at least 30–40% for tax, NI, and pension when planning finances.

3. Not tracking sales vs payments

Mistake: Expecting immediate payment when commission is deferred.
Fix: Maintain a spreadsheet tracking: sale date, value, expected commission, payment date, actual payment.

4. Misunderstanding clawbacks

Mistake: Spending commission before it’s “locked in.”
Fix: Understand your clawback terms. If customers can cancel within 30/60/90 days, your commission isn’t safe until after that period.

5. Not clarifying “sales” vs “revenue recognised”

Mistake: Thinking you earn commission when the deal is signed, but payment is based on when the customer pays.
Fix: Clarify whether commission is based on bookings (deal signed) or revenue (payment received).

6. Assuming OTE is guaranteed

Mistake: Treating OTE as your actual salary.
Fix: Research what percentage of reps actually hit 100% OTE. Budget on the median, not the maximum.

Frequently asked questions