Commission and placement fees, allowable expenses, IR35 versus self-employment, VAT, NIC and MTD for Income Tax explained for UK self-employed recruiters.
The tax problem for a self-employed recruitment consultant is not volume, it is timing and size. You might place three candidates in a strong month and none in the next two. A single perm placement can carry a fee of several thousand pounds, invoiced the moment the candidate starts but paid 30 or 60 days later, and sometimes clawed back if the placement falls through inside a rebate period. Money arrives in big, irregular chunks, which makes it easy to drop a fee into the wrong tax year or to spend the gross before the tax on it has been set aside.
This guide is built around how recruiters actually earn: placement and commission income, the all-important question of whether you are genuinely self-employed or quietly inside PAYE through an umbrella or IR35, the job-board and software costs that dominate the expense list, VAT (which recruiters hit sooner than most trades), and the National Insurance and MTD timing that follow. Get the status question right first, then the rest is straightforward bookkeeping.
As a sole trader you pay Income Tax on profit, which is total placement fees and commission minus allowable expenses. For 2025/26 the personal allowance covers the first GBP 12,570, then you pay 20% to GBP 50,270, 40% to GBP 125,140 and 45% above, with the personal allowance tapering away between GBP 100,000 and GBP 125,140 to create an effective 60% band. Successful recruiters routinely reach the higher-rate band, so this taper matters. Class 4 National Insurance is 6% on profit between GBP 12,570 and GBP 50,270 and 2% above, with Class 2 NIC settled through Self Assessment.
Scottish recruiters pay Scottish Income Tax on profit through six bands (19%, 20%, 21%, 42%, 45% and a 48% top rate) and carry an S-prefixed tax code, while National Insurance stays UK-wide. Welsh recruiters have a C-coded tax code at rates currently matching the rest of the UK. If you also hold a PAYE recruitment role and freelance on the side, your code can easily go wrong, so run it through the tax code checker to make sure your allowance is not being double-counted or stripped out.
This is the question that trips up more recruiters than any expense ever will. A large share of people who describe themselves as freelance recruiters are in fact engaged through an agency or an umbrella company that runs their pay through PAYE, deducting Income Tax and Class 1 National Insurance at source. If that is you, there is very little to file as self-employment, and you should not be treating your earnings as trading profit.
The practical test is simple: look at how you are paid. If a payslip shows PAYE and NIC already deducted, your tax is largely handled and this guide's self-employment rules do not apply to that income. If you invoice clients directly, win and lose placement fees at your own risk, and decide your own hours and methods, you are a genuine sole trader and your fees are trading income. Many recruiters sit in both worlds, perhaps a PAYE consultancy contract plus direct freelance placements, which is exactly the multiple income streams situation covered below.
Recruitment income comes in a few recognisable shapes, and the timing rules matter because the amounts are large.
| Income type | How it is usually taxed | Watch out for |
|---|---|---|
| Permanent placement fees | Self-employment trading income | Taxable when invoiced/earned, not when paid; large single amounts |
| Contractor/temp margin | Trading income on your margin | Report your margin, not the contractor's full rate, if you are the agency |
| Retained search fees | Trading income, often in stages | Each stage payment is taxable when earned |
| Commission and bonuses | Trading income | Personal commission from a PAYE role is taxed at source, not self-employed |
| Rebate clawbacks | Reduce income in the period they arise | A placement that fails inside the rebate window reverses earlier income |
| Referral fees | Trading income | Small but easy to forget; still taxable |
Under the accruals basis, a fee is taxed in the year you earn it, even if the client pays late. A placement that starts on 20 March but pays in April falls in the earlier tax year. Equally, if a placement collapses inside the rebate period and you refund the fee, that reduction belongs in the period the clawback happens. Because the numbers are big, getting the year right can move thousands of pounds of profit across a tax-year boundary. Use the multiple-income tax calculator if you mix freelance placements with PAYE work to see how the streams stack.
An expense is allowable when incurred wholly and exclusively for the business. A recruiter's costs are dominated by sourcing tools and software rather than physical equipment, so the list looks very different from a trade or construction job.
| Expense | What qualifies | Notes |
|---|---|---|
| Job boards and CV databases | LinkedIn Recruiter, Indeed, CV-Library, Reed, Totaljobs, Monster | Often the single largest cost; fully deductible |
| ATS / CRM software | Applicant tracking, candidate CRM, scheduling, e-signature | Subscriptions are fully deductible |
| Computer and peripherals | Laptop, second monitor, headset, webcam, ergonomic chair | Usually claimed in full via the Annual Investment Allowance |
| Phone and call costs | Mobile contract and call charges, business share only | Exclude the private-use proportion |
| Home-office or hot-desk | HMRC flat-rate working-from-home allowance, or a fair share of household costs; serviced-office or co-working hot-desk rent | Choose the larger fair deduction |
| Business travel | Mileage, train and parking to client and candidate meetings, interviews and pitches | Ordinary commuting to a regular base is not allowable |
| Marketing and website | Recruiter website, branded profiles, paid ads, email tools | Fully deductible running costs |
| Professional memberships | REC, APSCo and similar bodies | Allowable where relevant to the trade |
| Insurance | Professional indemnity and public liability cover | Fully deductible |
| Accountancy and bank fees | Bookkeeping, Self Assessment, business banking | Fully deductible |
Many independent recruiters split their week between home and a serviced-office hot-desk, and both can be claimed. For home working, use HMRC's simplified flat rate based on the hours worked at home each month, or claim an actual proportion of heat, light, broadband and rent or mortgage interest based on the rooms and time used. A dedicated co-working or serviced-office desk hired purely for the business is fully deductible. On travel, journeys to a specific client site, a candidate interview or a pitch are allowable, but ordinary commuting to a regular working base is not, and neither is the private share of any dual-use phone or broadband.
Everyday clothing is never allowable, even a suit bought specifically for client meetings. Entertaining clients or candidates, the classic recruiter's coffee or lunch to win a brief, is specifically disallowed for tax even though it is a real business cost. The private portion of your mobile, broadband and devices must be stripped out, and ordinary commuting between home and a regular office is not deductible. Note that recruitment is a professional service trade, so unlike construction trades there is no Construction Industry Scheme to deal with; if you ever also work in construction, that is covered separately in our CIS subcontractor guide.
Take a direct-to-client recruiter billing GBP 72,000 of placement fees and commission for the year, working from home with a hot-desk two days a week.
Income: GBP 72,000 (perm placement fees GBP 58,000, contractor margin GBP 14,000)
Allowable expenses:
Taxable profit: GBP 72,000 minus GBP 19,000 = GBP 53,000
Income Tax: GBP 53,000 minus GBP 12,570 = GBP 40,430 taxable. GBP 37,700 at 20% = GBP 7,540, plus GBP 2,730 at 40% = GBP 1,092. Total Income Tax = GBP 8,632.
Class 4 NIC: GBP 37,700 at 6% = GBP 2,262, plus GBP 2,730 at 2% = GBP 55. Total = GBP 2,317.
Total tax and NIC: roughly GBP 10,949 for the year. This recruiter has crossed into the higher-rate band and is close to the VAT threshold, so both need watching. Run your own fees and costs through the sole trader tax calculator to see where you land.
For a recruiter, the danger is spending the placement fee before you have set aside the tax on it. Big invoices feel like big paydays, but a third of that profit already belongs to HMRC.
Recruitment is one of the trades that reaches the VAT threshold fastest, because placement fees are large. You must register once taxable turnover exceeds GBP 90,000 in any rolling 12-month period, and a single busy full-desk recruiter can get there on one strong run of placements. The good news is that most recruitment clients are VAT-registered businesses, so they simply reclaim the VAT you charge and registration is relatively painless, while you reclaim VAT on job boards, software and equipment. The trap is the rolling 12-month test: it is not the tax year, so a cluster of high fees in spring can tip you over before you notice. Keep a running 12-month total and register within 30 days of crossing the line. Note that if you operate as a true agency supplying temps, special VAT rules can apply to how you account for the worker's pay versus your margin, so take advice before you scale that model.
On profit, you pay Class 4 NIC at 6% between GBP 12,570 and GBP 50,270 and 2% above, with Class 2 NIC dealt with through Self Assessment. Because recruiters often reach higher-rate income, the 2% Class 4 band and the personal-allowance taper above GBP 100,000 both come into play sooner than for lower-earning trades.
Making Tax Digital for Income Tax replaces the annual return with quarterly digital submissions and a year-end finalisation. The thresholds are based on gross income, not profit:
Recruiters frequently bill well above GBP 50,000 of fees, so many will be in the first wave from April 2026. Instead of pulling a year of placement invoices together each January, you record each fee, margin and clawback digitally as it arises and send HMRC a quarterly summary. For lumpy, high-value recruitment income that is genuinely helpful: capturing fees as they land keeps you on top of how much tax you owe. Our guide to MTD for sole traders walks through what the quarterly rhythm looks like in practice.
Treating umbrella or IR35 pay as self-employment. If your income already has PAYE and NIC deducted at source, it is not trading profit and should not be on a self-employment page twice.
Spending the gross fee. A GBP 5,000 placement is not GBP 5,000 of yours. Set aside roughly 30% for tax and NIC the moment the fee is earned.
Mis-timing income across the year-end. A placement starting in late March is taxable in that tax year even if paid in April; getting the timing wrong moves large sums into the wrong year.
Forgetting rebate clawbacks. When a placement fails inside the rebate window and you refund the client, reduce your income for the period rather than ignoring it.
Missing the rolling VAT threshold. Recruiters hit GBP 90,000 fast and on a rolling, not tax-year, basis. Track the running 12-month total so a strong quarter does not catch you out.
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