What is an overhead rate, and why should you care?

Your overhead rate is the percentage of your total revenue that gets eaten by non-billable costs. Rent, software subscriptions, accounting fees, marketing spend, office coffee, the lot.

If your agency turns over £600,000 and your overheads come to £240,000, your overhead rate is 40%. That means for every £1 you invoice, 40p goes to keeping the lights on before you pay anyone to do actual client work.

Most agency founders I meet have a rough idea of their revenue and their profit. Very few know their overhead rate off the top of their head. That is a problem, because your overhead rate is the single most useful number for pricing, hiring, and deciding whether to take on that next retainer.

As ICAEW qualified accountants who work exclusively with agency founders, we see the same pattern repeat: agencies that track this number grow faster and exit cleaner. Those that don't eventually hit a margin wall they cannot explain.

This post covers the average agency overhead rate UK, how to calculate yours in 10 minutes, and what to do if your number is too high.

What counts as overhead?

Overhead is anything you spend money on that does not directly generate billable client work. That sounds simple, but the line gets blurry fast.

Here is what goes in the overhead bucket:

  • Rent and utilities (office space, co-working membership, broadband)
  • Software subscriptions (Xero, QuickBooks, Asana, Slack, Figma, Adobe Creative Cloud, Dext, Float, Spotlight Reporting)
  • Marketing and business development (website hosting, Google Ads, content writers, conference tickets)
  • Professional fees (your accountant, your solicitor, your insurance broker)
  • Office supplies and facilities (laptops for the team, monitors, stationery, coffee, cleaning)
  • Salaries for non-billable roles (the finance manager, the office manager, the HR person, you if you are not billing)
  • Training and recruitment (hiring costs, onboarding, external courses)
  • Bank charges, loan interest, currency conversion fees

And here is what does not count as overhead:

  • Direct staff salaries for people who bill clients (designers, developers, copywriters, strategists on client projects)
  • Freelancer and contractor costs charged directly to client projects
  • Direct project expenses (stock photography, print, media spend, third-party licences passed through to clients)

The rule of thumb: if you can trace the cost to a specific client project, it is direct. If you cannot, it is overhead.

What is the average agency overhead rate UK?

The average agency overhead rate UK sits between 30% and 50% for most established agencies. The exact number depends on your agency type, your stage of growth, and your location.

Here is what we see across our client base:

  • Small agencies (2-5 people, turnover under £300k): overhead rates between 40% and 55%. The fixed costs of software, accounting, and marketing hit harder when spread over a smaller revenue base.
  • Mid-sized agencies (6-20 people, turnover £300k-£1.5m): overhead rates between 30% and 45%. Economies of scale start to kick in, but you are also adding non-billable roles like a finance person or a head of delivery.
  • Larger agencies (20+ people, turnover over £1.5m): overhead rates between 25% and 40%. More revenue to spread the fixed costs, but also more management overhead, bigger offices, and higher marketing spend.

A digital agency based in Manchester Northern Quarter with six people billing £700k might run a 38% overhead rate. A creative agency in Soho with fifteen people billing £1.8m might run 42% because of the rent and the client entertainment.

The average agency overhead rate UK across all agency types we work with is roughly 38%. That is not a target, it is a benchmark. If you are above 50%, you have a structural problem. If you are below 25%, you are either very efficient or underinvesting in growth.

How to calculate your overhead rate in 10 minutes

You need two numbers: your total overhead costs and your total revenue. Both should come from your most recent 12 months of management accounts, not your tax return.

Here is the formula:

Overhead Rate (%) = (Total Overhead Costs / Total Revenue) x 100

Let me walk through a real example. Say you run a 12-person digital agency billing £800,000 per year.

Your overhead costs for the last 12 months might look like this:

  • Rent and utilities: £24,000
  • Software subscriptions: £18,000
  • Marketing and business development: £22,000
  • Professional fees (accountant, solicitor, insurance): £14,000
  • Office supplies and equipment: £9,000
  • Non-billable salaries (finance manager, part-time office manager): £36,000
  • Training and recruitment: £6,000
  • Bank charges and interest: £3,000

Total overhead: £132,000.

Overhead rate: (£132,000 / £800,000) x 100 = 16.5%.

That is unusually low. This agency is probably underinvesting in marketing and has no senior management overhead because the founder does all the non-billable work for free. That is not sustainable.

Now take a 15-person creative agency billing £1.2m based in Bristol Harbourside:

  • Rent and utilities: £48,000
  • Software subscriptions: £24,000
  • Marketing and business development: £36,000
  • Professional fees: £18,000
  • Office supplies: £12,000
  • Non-billable salaries (head of operations, finance manager): £72,000
  • Training and recruitment: £9,000
  • Bank charges: £4,000

Total overhead: £223,000.

Overhead rate: (£223,000 / £1,200,000) x 100 = 18.6%.

Still low. This agency is running lean, but the rent figure suggests a nice office, and the marketing spend is healthy. The low rate is driven by the high revenue per head (£80k per person) and the fact that the non-billable headcount is only two people.

A more typical scenario: a 10-person PR agency in Shoreditch billing £600,000.

  • Rent and utilities: £36,000
  • Software subscriptions: £15,000
  • Marketing and business development: £24,000
  • Professional fees: £12,000
  • Office supplies: £8,000
  • Non-billable salaries (account director who does no billing, part-time finance): £54,000
  • Training and recruitment: £5,000
  • Bank charges: £2,000

Total overhead: £156,000.

Overhead rate: (£156,000 / £600,000) x 100 = 26%.

That is below the average agency overhead rate UK of 38%. This agency is doing well, but the revenue per head is only £60k, which is on the lower side for a PR agency. If they want to grow, they need to push rates up or add more billable heads without adding more overhead.

What drives your overhead rate up or down

Three factors determine whether your overhead rate is healthy or dangerous.

Revenue per head

This is the biggest lever. If your revenue per head is £50,000, your overhead rate will always look high because the denominator is small. If your revenue per head is £100,000, the same fixed costs produce a much lower rate. Target £70k-£90k for most agency types. Recruitment agencies often run higher because of the commission model.

Non-billable headcount

Every person you hire who does not bill clients adds directly to overhead. That is fine when you are big enough to justify it. A finance manager at £45k is a good investment if they save you £60k in errors and late payments. The same hire at £45k when you are turning over £250k is a disaster.

Fixed cost discipline

Software subscriptions are the silent killer. I have seen agencies paying for six project management tools, three accounting platforms, and two CRM systems because nobody audited the direct debits. Run a quarterly subscription audit. Cancel anything unused. That alone can shave 2-3% off your overhead rate.

What to do if your overhead rate is too high

If your overhead rate is above 50%, you have two options: cut costs or grow revenue. You need to do both.

Start with the cost side. Look at every line item and ask: does this directly help us win or deliver work? If the answer is no, cut it or reduce it. That includes the WeWork membership you never use, the PR retainer that has not generated a lead in six months, and the Adobe licence for someone who left three months ago.

Then look at revenue. Can you raise your rates? Most agency founders underprice by 15-25%. If your utilisation rate is above 80% and your overhead rate is still high, the answer is not to work more hours. It is to charge more per hour.

If your overhead rate is between 40% and 50%, you are in the normal range but on the high side. Focus on growing revenue without adding proportional overhead. That means winning retainer work (predictable, lower acquisition cost) rather than one-off projects (high sales cost, lumpy cash flow).

If your overhead rate is below 30%, congratulations. But do not get complacent. Low overhead can mean you are underinvesting in the systems and people that will let you scale. A 28% overhead rate on £500k is fine. The same rate on £2m is a warning sign that you are not building the infrastructure for the next stage.

Overhead rate and your agency type

Different agency types have different overhead profiles. Here is what we see in practice:

  • Digital agencies: lower overhead (30-40%) because they need less physical space and can operate with fewer non-billable roles. The main overhead is software and specialist freelancers.
  • Creative agencies: higher overhead (35-50%) because of office space for in-person reviews, equipment costs, and the need for account management roles that do not bill directly.
  • PR agencies: moderate overhead (30-45%) but with a higher proportion going to marketing and business development because reputation and relationships drive new business.
  • Recruitment agencies: variable overhead (25-40%) because the commission model means high revenue per head but also high marketing spend on job boards and LinkedIn.
  • Web design agencies: lower overhead (28-38%) because they can operate remotely with minimal physical footprint, but higher software costs for hosting, testing, and development tools.

If you run a marketing agency or a digital agency, your overhead should sit at the lower end of the range. If you run a creative agency or a advertising agency, expect to be at the higher end.

Tracking overhead rate in your management accounts

Your overhead rate should appear in your management accounts every single month. Not just at year-end when your accountant prepares the annual accounts. Monthly.

Set up your chart of accounts in Xero or QuickBooks so that overhead costs are tagged to a specific category. Then run a monthly P&L that shows total overhead as a percentage of revenue. Compare it to the previous month and the same month last year.

If your overhead rate jumps by more than 3% in a single month, investigate. It could be a one-off cost like a new hire's laptop and onboarding. Or it could be a new software subscription that is about to become a recurring drain.

For agencies using FreeAgent or Sage, the same principle applies. The tool does not matter. The discipline does.

Overhead rate and your exit

If you are planning to sell your agency in the next three to five years, your overhead rate matters more than your profit margin. A buyer looks at overhead rate as a measure of operational efficiency. A rate consistently below 35% signals a well-run business with scalable systems.

A rate above 45% signals a business where the founder is doing too much non-billable work and has not built the right team underneath them. That discount on valuation can be substantial.

If you are thinking about exit, read our guide on growth and exit planning. And if you want to understand how your agency structure affects your overhead, look at incorporation and structure options.

Final thought

Your overhead rate is not a vanity metric. It is the number that tells you whether your agency can survive a quiet quarter, whether you can afford that new hire, and whether your pricing is right.

Calculate it today. If you do not have management accounts that give you this number monthly, ask your accountant to set them up. If your accountant cannot do that, it might be time to find one who works with agencies.

If your overhead rate is above 50%, start cutting. If it is below 25%, start investing. If it is between 30% and 45%, you are in the average agency overhead rate UK range. Keep tracking it and keep pushing it down as you grow.

We work with agency founders every day on exactly this. If you want to benchmark your overhead rate against similar agencies, get in touch.