CIS Scheme Explained for Subcontractors. What You Need to Know

If you work as a subcontractor in the construction industry, you've almost certainly had CIS deductions taken from your pay. The Construction Industry Scheme is one of those things that most subbies accept without fully understanding. and that's a problem, because it directly affects how much money ends up in your pocket.

This guide explains what CIS is, how it works, how much gets deducted, and. crucially. how you can reclaim the money that's been taken.

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax deduction system run by HMRC. It requires contractors (the people or companies who hire subcontractors) to deduct money from subcontractors' payments and pass it to HMRC as advance payments towards the subcontractor's tax and National Insurance bill.

Think of it as tax being taken at source. similar to PAYE for employees, but for self-employed subcontractors. The key difference is that you're not an employee; you're still self-employed, but the contractor handles part of your tax payment for you.

CIS applies to all construction work in the UK, including:

• Building and construction
• Alterations, repairs, and decorating
• Demolition and dismantling
• Installing heating, lighting, power, water, and ventilation systems
• Civil engineering work (roads, bridges, etc.)
• Plastering, roofing, and tiling

It does not apply to professional services like architecture, surveying, or project management, even when they're related to construction projects.

Who Does CIS Apply To?

CIS involves two parties:

Contractors

A "contractor" under CIS isn't just a big building firm. You're classed as a contractor if you pay subcontractors more than £3 million per year for construction work, or if your average annual spending on construction exceeds £1 million over any three-year period. In practice, most main contractors and many medium-sized building companies are classed as contractors under CIS.

Certain organisations are always classed as contractors, regardless of spend. including local authorities, housing associations, and government departments.

Subcontractors

If you're self-employed and you do construction work for a contractor, you're a subcontractor under CIS. This applies whether you're a sole trader or a limited company.

It's worth noting that you can be both a contractor and a subcontractor. If you hire subbies to work on your projects while also doing subcontract work for others, CIS applies to both relationships.

CIS Deduction Rates

There are three CIS deduction rates, and which one applies to you depends on whether you're registered with HMRC:

• 20% deduction: This is the standard rate for registered subcontractors. The contractor deducts 20% from your labour payment (not materials) and sends it to HMRC on your behalf.
• 30% deduction: This is the higher rate for unregistered subcontractors. If you haven't registered with HMRC for CIS, the contractor must deduct 30% from your payments. This is a strong incentive to register.
• 0% deduction (gross payment status): If you qualify for gross payment status, the contractor pays you in full with no deductions. You then handle all your tax payments yourself.

The deduction is only applied to the labour element of your invoice. If you supply materials separately and itemise them on your invoice, those aren't subject to CIS deductions. This is one of the reasons why getting your invoicing right matters. if you lump everything together, the contractor may deduct CIS from the entire amount.

How to Register for CIS

Registering as a subcontractor is straightforward and there's no cost involved. You can register online through your HMRC Government Gateway account, by phone on 0300 200 3210, or through your accountant.

You'll need:

• Your National Insurance number
• Your Unique Taxpayer Reference (UTR). you get this when you register for Self Assessment
• Your business details (name, address, trade)

Once registered, HMRC assigns you a verification number. When a contractor checks your status (which they're required to do before making any payment), HMRC will confirm that you're registered and tell the contractor to apply the 20% rate rather than 30%.

If you're not already registered for Self Assessment, you'll need to do that first. HMRC will issue your UTR, and then you can register for CIS.

Gross Payment Status. Paying No CIS Deductions

Gross payment status means contractors pay you in full without deducting anything. You then pay your own tax in the normal way through Self Assessment. This improves your cash flow significantly, as you're not waiting to reclaim overpayments.

To qualify for gross payment status, you need to meet three tests:

• Business test: You must be carrying on a construction business in the UK and running it through a bank account.
• Turnover test: Your annual turnover from construction work must be at least £30,000 (for sole traders). For partnerships, it's £30,000 per partner, and for companies, it's £30,000 per relevant director.
• Compliance test: You must have a clean compliance record with HMRC. all tax returns filed on time, all tax paid on time, and no outstanding debt. HMRC checks this annually and can revoke gross status if you fall behind.

Gross payment status is worth pursuing if you qualify. The improved cash flow means you have use of the full payment amount until your tax is due, rather than having 20% held back on every invoice.

Monthly Returns. What Contractors Must Do

If you're a contractor (i.e., you hire subcontractors), you have obligations under CIS:

• Verify subcontractors: Before paying any subcontractor for the first time, you must verify them with HMRC. This tells you what deduction rate to apply.
• Make deductions: Deduct the correct amount (20% or 30%) from the labour portion of each payment.
• Submit monthly returns: File a CIS return with HMRC by the 19th of each month, detailing all payments made to subcontractors and the deductions taken.
• Provide payment and deduction statements: Give each subcontractor a written statement showing the gross amount, deductions made, and net payment. The subcontractor needs these to reclaim their deductions.

Failing to submit monthly returns on time results in penalties. £100 for each month the return is late, per return. For larger contractors with many subcontractors, these penalties can add up quickly.

How to Reclaim CIS Deductions

This is the part that matters most to subcontractors. The CIS deductions taken from your payments are advance payments towards your tax bill. When you file your Self Assessment tax return at the end of the year, these deductions are offset against your total tax and National Insurance liability.

Here's what typically happens:

• Throughout the year, 20% is deducted from your labour invoices
• At the end of the tax year, you file your Self Assessment return
• Your actual tax liability is calculated based on your total income and allowable expenses
• The CIS deductions you've suffered are deducted from this liability
• If you've had more deducted than you owe, HMRC refunds the difference

Many subcontractors are entitled to a refund because their actual tax rate, after accounting for all expenses and allowances, is less than the flat 20% deducted under CIS. Common deductible expenses include van costs, tools, fuel, insurance, work clothing, and phone costs.

To reclaim, you need to keep:

• All payment and deduction statements from your contractors
• Records of all your business expenses with receipts
• Bank statements showing payments received

If you're operating as a limited company, CIS deductions are offset against your PAYE/NI liabilities rather than through Self Assessment. Your accountant can handle this through your company's payroll returns.

Common CIS Mistakes to Avoid

• Not registering: The difference between 20% and 30% deductions is significant. If you're working as a subcontractor and haven't registered, you're handing an extra 10% to HMRC on every payment.
• Not separating labour and materials: If your invoice doesn't clearly separate labour from materials, the contractor may apply CIS deductions to the entire amount. Always itemise your invoices.
• Losing deduction statements: Without these, you can't prove how much CIS has been deducted, which makes reclaiming difficult. Keep every statement filed safely.
• Not claiming all expenses: The more legitimate expenses you claim, the lower your actual tax liability, and the more of your CIS deductions you'll get back. Keep receipts for everything.
• Missing the Self Assessment deadline: If you don't file your tax return, you can't reclaim your CIS deductions. The deadline is 31 January following the end of the tax year (e.g., 31 January 2027 for the 2025/26 tax year).

The Bottom Line

CIS is a fact of life for construction subcontractors. The most important things are to register (to avoid the 30% rate), keep your invoices properly itemised with labour and materials separated, save all your deduction statements, and claim all your allowable expenses when you file your tax return.

A good accountant who understands construction will ensure you're reclaiming every penny you're entitled to. The cost of an accountant is almost always offset by the additional deductions and refunds they identify. If your turnover is growing, it's also worth discussing whether a limited company structure might be more tax-efficient for your situation.