Direct vs Overhead Staff Costs (UK Accounting Context)

Category

Direct Costs

Overhead Costs

PAYE Employees

Staff whose time is directly attributable to delivering a product or service
- Example: a technician working on client jobs, or a developer building your app

Staff who support the business but aren’t tied to specific revenue-generating tasks
- Example: admin staff, HR, finance, or general management

Contract / Consultants

Freelancers or contractors working on specific deliverables
- Example: a marketing consultant creating campaign assets for a client

Strategic advisors, legal consultants, or fractional roles not tied to direct output
- Example: a retained CFO or brand strategist

🧮 How This Maps in Xero or Management Packs

Direct Costs often sit under Cost of Sales (or Direct Labour) in your P&L.
- These are variable and scale with revenue.
- Useful for calculating gross margin.
Overhead Costs are part of Operating Expenses.
These are fixed or semi-fixed.
Useful for understanding net margin and operational efficiency.

💡 Tips for Clear Reporting

In Xero, use Tracking Categories or Custom Account Codes to tag staff costs by function (e.g., “Client Delivery” vs “Admin”).
For consultants, clarify whether their work is project-based (direct) or retained/advisory (overhead).
In investor packs, show staff cost allocation to highlight scalability and margin control.