How to calculate margin on a contract placement (with a worked example)
A plain-English guide for UK agencies to calculating contractor margin: pay rate vs charge rate, on-costs, PAYE vs umbrella vs Ltd, and how margin feeds commission.
Ask three people on a contract desk what the margin is on a placement and there’s a fair chance you’ll get three different answers. One will give you the difference between the charge rate and the pay rate. One will knock off employer NI. And one will tell you it depends on whether the contractor is PAYE or Ltd, which is true, but not very helpful when you’re trying to work out whether a deal is worth doing.
It matters, because margin isn’t just a number on a report. It’s what pays for your desk, and in most agencies it’s what commission is calculated from. Get it wrong and you either underprice placements or end up arguing with consultants about what they’re owed.
I’ve spent seven years in recruitment software, and margin and commission are where I’ve seen the most confusion. So here’s how I’d work it out, with an example.
Pay rate vs charge rate
Two numbers sit at the heart of every contract placement:
- Charge rate. What you bill the client, per hour or per day.
- Pay rate. What you pay out for the contractor’s time, per hour or per day.
The gap between the two is your gross margin. If you charge £30 an hour and pay £20, that’s £10 an hour.
The catch is that for some contractors, the pay rate isn’t the whole cost. Which brings us to on-costs.
The on-costs that eat into PAYE margin
If the contractor is on your own PAYE payroll, you’re their employer for payroll purposes and you carry employer costs on top of the pay rate. The main ones for the 2026/27 tax year are:
- Employer National Insurance. 15% on earnings above the secondary threshold of £96 a week (GOV.UK, rates and thresholds for employers 2026 to 2027).
- Holiday pay. Workers are entitled to 5.6 weeks’ paid holiday a year. For irregular-hours workers, many agencies accrue it at 12.07% of hours worked, or roll it up into the hourly rate. Either way, it’s a cost, and you need to know whether your pay rate includes it or sits on top of it.
- Employer pension. Under auto-enrolment, the employer minimum is 3% of qualifying earnings, which for 2026/27 are earnings between £6,240 and £50,270 a year, or £120 to £967 a week (The Pensions Regulator).
- Apprenticeship levy, where relevant. 0.5% of your annual pay bill, but only if your pay bill is over £3 million, and you get a £15,000 allowance against it (GOV.UK, pay Apprenticeship Levy). Plenty of small agencies won’t pay it at all.
Don’t get me wrong, there are other costs too: insurance, payroll software, the time your back office spends on it. Some agencies load those in, most don’t. Whatever you choose, be consistent, because a margin figure only means something if everyone calculates it the same way.
PAYE, umbrella and Ltd: why the maths changes
The contractor’s engagement type changes what “pay rate” actually means.
- PAYE. You run the payroll, so you carry all the on-costs above. Your true margin is the charge rate minus the pay rate minus on-costs.
- Umbrella. The contractor is employed by an umbrella company. You pay the umbrella an assignment rate, and the umbrella deducts employer NI, holiday pay, pension and its own fee from that before paying the contractor. Your margin is simply the charge rate minus the assignment rate. It’s worth checking your umbrellas properly, as you’re expected to know where the money goes.
- Limited company (Ltd). You pay the contractor’s company against an invoice, usually plus VAT. There are no employer on-costs for you, so margin is the charge rate minus the rate you pay their company. Just be clear on who’s responsible for IR35 status, because that can change the picture entirely.
This is why comparing raw rates across contractors is misleading. A £25 an hour Ltd contractor and a £20 an hour PAYE contractor can cost you roughly the same.
A worked example (illustrative)
The figures below are illustrative, with round numbers and the 2026/27 rates above, to show the method. They aren’t advice, and your own payroll will have its own quirks.
Say you place a PAYE contractor for a 40-hour week, charging the client £30 an hour and paying the contractor £20 an hour, with holiday accrued on top at 12.07%.
| Item | Weekly |
|---|---|
| Charge to client (40 × £30) | £1,200.00 |
| Pay (40 × £20) | £800.00 |
| Holiday pay (12.07% of £800) | £96.56 |
| Employer NI (15% of £896.56 less £96) | £120.08 |
| Employer pension (3% of £896.56 less £120) | £23.30 |
| Apprenticeship levy (0.5%, only if liable) | £4.48 |
| Total cost | £1,044.42 |
| Margin | £155.58 (about 13% of charge) |
The “£10 an hour” gross margin from earlier, £400 for the week, is closer to £156 once the on-costs are in. That’s a big difference if you’re quoting rates off the top of your head.
Now swap the same role to a Ltd contractor at £25 an hour, with no on-costs for you. Cost is £1,000, margin is £200, nearly 17%. The contractor’s on a higher rate and you’re still making more on it. Honestly, that’s the comparison a lot of desks never quite do.
How margin feeds commission
In most agencies I’ve seen, contract commission is paid as a percentage of margin, not of the charge. So whatever goes into the margin figure goes straight into someone’s pay packet.
That’s where the arguments start. If one report uses gross margin and another uses margin after on-costs, the consultant sees one number and finance pays out on another. Agree the definition up front, write it down, and calculate it the same way every time. Ideally the margin is worked out once, from the timesheet, and commission flows from that.
Splits: where commission gets messy
Contract commission is rarely one person’s. A resourcer finds the contractor, a consultant owns the client, and both expect a share. A typical split might be 60% to the consultant and 40% to the resourcer, but every agency has its own rules.
The tricky bits, in my experience:
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Splits change mid-placement. A consultant leaves, a desk is restructured, or a placement is handed over. A long contract can easily outlive the arrangement it started with. You need to know who was entitled to what share for each week, not just who owns it today.
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Splits don’t always add up to 100%. Sometimes that’s deliberate. A manager might take an override on top, or a share might be held back. Sometimes it’s a mistake. Either way, you want it to be a decision someone made, not something you discover at month end.
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Splits by role, not just by person. Recording who did what (consultant, resourcer, account manager) makes it much easier to apply your rules consistently when people move around.
If you’re running this in a spreadsheet, the dates are what usually break first. Keep a start and end date on every split, and work commission out week by week from the timesheet.
Where Paid & Billed fits in
I’m building Paid & Billed for small UK contract desks that want this to be less of a monthly argument. The idea is that timesheets drive the pay, the invoice and the margin, and commission splits are recorded with dates and roles, so the numbers come from one place.
It’s still in development, so I’m not going to pretend it does all of that today. But this is exactly the kind of maths I want it to handle properly, and I’d much rather build it with agencies who deal with it every week.
If you’d like to follow along, or help shape what gets built, you can join the waitlist.
