How to set up a system to manage staff wages and commissions

To pay your staff correctly and legally, you must implement a payroll system that accurately tracks hours worked, calculates commissions, and processes deductions through HMRC's Pay As You Earn (PAYE) scheme. The most critical requirement is ensuring that every employee's total pay (base wage plus qualifying commission) never falls below the UK National Minimum Wage (NMW) for their age group during any given pay period.

1. Choose your commission structure

In the hairdressing and beauty industry, commission is a powerful motivator. You need to decide how you will reward your staff for service sales (haircuts, colours) and retail sales (shampoos, styling products). Common models include:

• Flat Percentage: A fixed percentage of all revenue the stylist generates (e.g., 10% on services).
• Tiered Commission: The percentage increases as the stylist hits higher revenue targets.
• Retail Commission: Usually a separate, smaller percentage for selling products to clients.

2. Calculate "Gross Pay" and the NMW check

Your system must track the total hours worked by each staff member. This is vital because even if a stylist is on a "commission-only" or "commission-heavy" structure, you are legally responsible for ensuring they earn at least the National Minimum Wage for every hour they are at work.

Component	Example Calculation
Base Hourly Pay	40 hours x £11.44 = £457.60
Service Commission	10% of £1,000 sales = £100.00
Retail Commission	5% of £200 sales = £10.00
Total Gross Pay	£567.60

Note: If the "Total Gross Pay" divided by "Hours Worked" is less than the current NMW rate, you must top up their pay to meet the legal minimum.

3. Automate with software

Manual spreadsheets are prone to error and can lead to costly disputes or HMRC fines. For a modern salon, it is best to use a two-part software approach:

1. Salon Management Software: Tools like Fresha, Booksy, or Timely automatically track which stylist performed which service and what products they sold. Most can generate a "Commission Report" at the end of the month.
2. Payroll Software: Use HMRC-recognised software (like Xero, Sage, or QuickBooks) to turn those reports into payslips. These tools calculate Income Tax, National Insurance, and pension contributions automatically.

4. Set a clear pay cycle and "Cut-off" date

Decide whether you will pay staff weekly or monthly. Establish a "cut-off" date (e.g., the 25th of the month) where all commissions are tallied. Any services performed after this date should roll over to the following month's pay packet. This gives you time to run the numbers and ensure the funds are in your business account for payday.

Top Tip: Always provide a written "Commission Agreement" as part of the employment contract. This should clearly state whether commission is calculated on "Net" sales (after VAT) or "Gross" sales, and what happens to commission if a client returns for a refund.

5. Issue payslips and report to HMRC

By law, you must provide staff with a payslip on or before payday. Your payroll system will generate a Full Payment Submission (FPS) which must be sent to HMRC every time you pay your team. This ensures the correct tax is being paid and prevents "hidden" liabilities from building up.