The on-load voltage distortion in fractional slot surface-mounted permanent magnet machines refers to the phase terminal voltage distorted by armature reaction. With the aid of frozen permeability method, the mechanism of this phenomenon has been investigated based on a 12-slot/8-pole model as an example, showing that the local magnetic saturation in tooth-tips is the main cause, especially when small or closed slot openings are adopted. Then, its impacts on machine performance under vector control have been investigated. If the dc-link voltage is sufficient to satisfy all distorted voltage, i.e., operating in constant torque region, the phenomenon mainly contributes to torque ripple. However, it becomes more problematic in the flux weakening region if the dc-link voltage is limited. Both base-speed and torque-speed curve will significantly differ from the expected results calculated by fundamental voltages. Meanwhile, if the machine operates beyond the base speed, or considering the limited bandwidth in real systems, the phase currents may be distorted, which consequently increase the current harmonics and reduce the average torque. Finally, a prototype machine is manufactured and tested to validate the analyses.