CIS Tax Deductions Explained for Subcontractors

CIS Tax Deductions: What Every Subcontractor Needs to Know

The Construction Industry Scheme (CIS) catches out a lot of subcontractors — especially those just starting out. Money gets deducted from your payments, your cash flow takes a hit, and if you're not set up properly you could be losing 30% instead of 20%. Here's how it all works and what you can do about it.

What Is CIS?

CIS is a tax deduction scheme run by HMRC that applies to payments made by contractors to subcontractors in the construction industry. The contractor deducts a percentage from your payment and passes it to HMRC on your behalf, as an advance payment towards your tax and National Insurance bill.

It's not an extra tax — it's tax paid at source, similar to PAYE. At the end of the tax year, if you've had more CIS deducted than you owe, you can claim the difference back.

Who Does CIS Apply To?

You're a Contractor If You:

• Pay subcontractors working in construction
• Spend more than £3 million a year on construction (even if construction isn't your main business — this catches property developers, housing associations, and large landlords)

You're a Subcontractor If You:

• Do construction work for a contractor
• Are self-employed or operate through a limited company

What Counts as Construction Work?

CIS covers most physical construction work, including:

• Building, decorating, and renovating
• Demolition and dismantling
• Civil engineering
• Installing heating, lighting, ventilation, power, water, and drainage systems
• Roofing, plastering, painting, and glazing

It does not cover:

• Architecture and surveying
• Scaffolding hire (without labour)
• Carpet fitting
• Delivery of materials
• Making materials (off-site manufacturing)

The Three CIS Deduction Rates

| Status | Deduction Rate | Who It Applies To | |---|---|---| | Registered | 20% | Subcontractors registered with HMRC for CIS | | Unregistered | 30% | Subcontractors not registered with HMRC | | Gross payment | 0% | Subcontractors with gross payment status |

The difference between 20% and 30% is significant. On a £5,000 payment for labour:

• Registered (20%): £1,000 deducted, you receive £4,000
• Unregistered (30%): £1,500 deducted, you receive £3,500

That's £500 less in your pocket on a single payment — and you'll be waiting months to claim it back. Registration is free and takes minutes, so there's no reason not to do it.

Important: CIS Deductions Apply to Labour Only

CIS deductions are taken from the labour element of your invoice, not the materials. If your invoice breaks down as £5,000 labour and £2,000 materials, the deduction is calculated on the £5,000 only.

This is why it's crucial to separate labour and materials on every invoice. If you don't, the contractor is required to deduct CIS from the entire payment.

Worked Example: Monthly CIS Deduction

Let's say you're a registered subcontractor (20% rate) and you invoice a contractor for:

| Item | Amount | |---|---| | Labour: First fix plumbing | £4,200 | | Labour: Second fix plumbing | £2,800 | | Materials: Copper pipe, fittings, valves | £1,650 | | Total invoice | £8,650 |

CIS calculation:

• Total labour: £4,200 + £2,800 = £7,000
• CIS deduction at 20%: £7,000 × 0.20 = £1,400
• Materials (no deduction): £1,650

You receive: £8,650 – £1,400 = £7,250

The contractor sends the £1,400 to HMRC on your behalf. This £1,400 counts as a credit against your income tax and NI bill when you file your Self Assessment return.

If your total tax liability for the year turns out to be less than the total CIS deducted, you get the difference refunded. Want to run the numbers on your own invoices? The VAT & CIS Calculator will work out your net payment instantly.

How to Register for CIS

As a Subcontractor

1. You'll need: Your National Insurance number, your UTR (Unique Taxpayer Reference), and your legal name as registered with HMRC
2. Call HMRC's CIS helpline: 0300 200 3210 (Monday to Friday, 8am to 6pm)
3. Or register online through your HMRC Government Gateway account

Registration is free and usually takes effect within a couple of days.

If you don't already have a UTR, you'll need to register for Self Assessment first — which can take 10 working days for the UTR to arrive by post. Don't leave this until you've already started a job.

Getting Gross Payment Status (0% Deduction)

Gross payment status means no CIS is deducted — you receive the full payment and handle your own tax. To qualify, you need to meet three tests:

• Business test: You run a construction business in the UK (not just occasional odd jobs)
• Turnover test: Your annual construction turnover is at least £30,000 (or £30,000 per partner/director)
• Compliance test: You've filed all tax returns on time, paid all tax owed on time, and have no outstanding tax debts

HMRC reviews gross payment status annually. If you miss a filing deadline or a tax payment, they can revoke it — and they do.

How Verification Works

Before a contractor pays you for the first time (and periodically after that), they're required to verify you with HMRC. This confirms your registration status and tells them which deduction rate to apply.

The contractor verifies you using:

• Your legal name
• Your UTR
• Your National Insurance number (sole trader) or company registration number (limited company)

If the details don't match HMRC's records — for example, you give your trading name instead of your legal name — verification fails and the contractor must deduct at 30%. Make sure your contractor has the right details before your first invoice.

Monthly Returns and Payment Statements

What the Contractor Must Do

• Verify each subcontractor with HMRC before first payment
• Deduct CIS at the correct rate
• Submit a monthly CIS return to HMRC by the 19th of each month
• Pay the deductions to HMRC by the 19th (or 22nd if paying electronically)
• Give you a payment and deduction statement for each payment

Your Payment Statement

Keep every CIS payment and deduction statement you receive. You need these to:

• Verify the correct rate was applied
• Claim CIS deductions against your tax bill
• Reclaim any overpayments

If a contractor doesn't give you a statement, chase it. Without it, claiming back overpaid CIS becomes much harder.

Claiming Back CIS Overpayments

Most subcontractors pay more CIS during the year than they owe in tax. Here's how to get it back:

Sole Traders

Claim CIS deductions through your Self Assessment tax return (SA100). There's a specific section for CIS deductions suffered. HMRC will offset the CIS paid against your income tax and Class 4 NI bill. If there's a surplus, you'll get a refund.

Example:

• Total CIS deducted during 2025/26: £14,400
• Actual income tax + NI liability: £10,200
• Refund due: £4,200

This refund typically arrives 4–8 weeks after filing, but can take longer if HMRC decides to check your return. File early (the tax year ends 5 April, you can file from 6 April) and you'll get your money sooner.

Limited Companies

If you operate through a limited company, CIS deductions are offset against your PAYE/NI liability rather than corporation tax. You claim it through your monthly Employer Payment Summary (EPS) filed via your payroll software. If CIS deductions exceed your PAYE/NI bill, you can claim the difference back from HMRC.

Common CIS Mistakes

1. Not Registering

The single most expensive mistake. You're handing HMRC an extra 10% of every payment for no reason. Register before you start your first subcontract job.

2. Not Separating Labour and Materials on Invoices

If your invoice shows a single lump sum, CIS is deducted from the lot. Always itemise labour and materials separately.

Wrong:

Construction work at 14 Oak Lane — £8,650

Right:

Labour: First fix plumbing — £4,200 Labour: Second fix plumbing — £2,800 Materials: Copper pipe, fittings, valves — £1,650 Total: £8,650

3. Not Keeping Payment Statements

Without your CIS statements, you can't prove what was deducted and you'll struggle to reclaim overpayments. Keep digital copies — photograph them if they're paper.

4. Filing Self Assessment Late

If you file late, you not only get a £100 penalty (rising to more over time), but you also delay your CIS refund. The tax return deadline is 31 January for online filing — don't wait until the last week.

5. Giving Contractors Wrong Details

Your contractor verifies you with HMRC using your legal name and UTR. If you give them your trading name or an old address, verification fails and they'll deduct at 30%.

6. Not Factoring CIS Into Cash Flow

CIS deductions mean you won't receive the full invoice amount. Budget for this. If you're on the 20% rate, only 80% of your labour income actually hits your bank account each month. Plan your material purchases and overheads accordingly.

Key Dates to Remember

| Date | What | |---|---| | 5 April | End of the tax year | | 6 April | New tax year starts — you can file your return from this date | | 19th of each month | Contractor's deadline to submit CIS return and pay deductions | | 31 January | Self Assessment online filing deadline | | 31 July | Second payment on account due (if applicable) |

Summary

CIS doesn't have to be complicated. The key points:

1. Register — it takes minutes and saves you 10% on every payment
2. Separate labour and materials on every invoice
3. Keep all your payment and deduction statements
4. File your Self Assessment on time to reclaim overpayments quickly
5. Budget on receiving 80% of your labour income (at the 20% rate)

To quickly work out CIS deductions on any invoice, use the VAT & CIS Calculator. It handles the labour/materials split and shows you exactly what you'll take home.