CIS Tax Deductions Explained for Subcontractors

The Construction Industry Scheme is one of those things every subcontractor in the UK building trade has to deal with, but surprisingly few actually understand properly. You know money gets taken off your invoice before you get paid. You know it has something to do with tax. But beyond that, most subbies just accept the deduction and hope it all works out at the end of the tax year.

It does not always work out, and not understanding CIS can cost you real money. This guide explains the whole scheme in plain English, with no jargon and no waffle.

What is CIS?

The Construction Industry Scheme is an HMRC tax collection system that applies to construction work in the UK. Under CIS, contractors (the people or companies who pay for construction work) deduct tax from the payments they make to subcontractors, and send that money directly to HMRC. The subcontractor then receives a payment with tax already deducted.

Think of it like PAYE for the self-employed. Instead of the subcontractor paying all their tax in one lump sum through self-assessment, tax is collected throughout the year by the contractors who pay them.

Who Does CIS Apply To?

Contractors

A contractor under CIS is not just a main building contractor. It includes anyone who pays subcontractors for construction work and spends more than 3 million pounds per year on construction (this is rare for small businesses), or anyone whose main business is construction. Most builders, developers, and construction companies are contractors under CIS.

Subcontractors

A subcontractor is anyone who does construction work for a contractor. This includes sole traders, partnerships, and limited companies. If you are a self-employed plasterer working for a building firm, you are a subcontractor under CIS. If you are a self-employed electrician doing a rewire for a main contractor, you are a subcontractor.

What counts as construction work?

CIS covers most construction work including building, demolition, repair, decoration, installation of systems (heating, lighting, water, ventilation), and civil engineering. It does not cover architecture, surveying, or the delivery of materials.

CIS Deduction Rates

There are three CIS deduction rates:

20 percent: The standard rate for registered subcontractors. This is what most subbies pay. The contractor deducts 20 percent from the labour element of your invoice and sends it to HMRC.

30 percent: The higher rate for unregistered subcontractors. If you have not registered for CIS with HMRC, contractors must deduct 30 percent. There is absolutely no reason to pay 30 percent when you can register and pay 20 percent. Register immediately if you have not already.

0 percent (gross payment status): If you qualify for gross payment status, contractors pay you the full amount with no deductions. To qualify, you need to meet certain turnover, compliance, and business tests. Typically, you need annual construction turnover of at least 30,000 (sole trader) and a clean compliance record with HMRC.

How CIS Deductions Work in Practice

Here is a real example. You are a self-employed plasterer. You do a week's work for a main contractor and your invoice is 1,500 pounds (all labour, materials supplied by the contractor).

Your invoice: 1,500.00
CIS deduction at 20%: -300.00
Amount you receive: 1,200.00

The contractor sends the 300 pounds to HMRC on your behalf. This 300 pounds is not lost money. It is tax that has been paid in advance. When you do your self-assessment tax return at the end of the year, the CIS deductions are offset against your total tax bill.

Materials and CIS

CIS deductions only apply to the labour element of your invoice, not materials. If your invoice includes both labour and materials, the contractor should only deduct CIS from the labour portion. This is why it is important to separate labour and materials on your invoices.

For example, if your invoice is 2,000 total (1,500 labour + 500 materials), the CIS deduction should be 20 percent of 1,500 = 300, not 20 percent of 2,000 = 400.

How to Register for CIS

Registration is free and can be done online at gov.uk or by calling the HMRC CIS helpline on 0300 200 3210. You will need your National Insurance number and your UTR (Unique Taxpayer Reference) number. If you do not have a UTR, you need to register for self-assessment first.

Once registered, HMRC will give you a verification number. Contractors will verify your CIS status with HMRC before paying you, which confirms whether you are registered (20 percent deduction) or not (30 percent deduction).

Getting Your CIS Deductions Back

CIS deductions are advance payments of your income tax and National Insurance. When you file your self-assessment tax return, all CIS deductions are totalled up and offset against your tax bill.

If your CIS deductions exceed your actual tax liability (which is common if you have significant business expenses), you will get a refund from HMRC. This happens regularly for subbies who have high deductions but also claim significant expenses for vans, tools, fuel, and insurance.

Keeping records

Keep every CIS payment and deduction statement you receive from contractors. You need these to claim the deductions on your tax return. If you lose them, you may not be able to claim the deductions and you will end up paying tax twice on the same income.

Our invoice generator helps you create properly formatted invoices with separate labour and material lines, making CIS calculations straightforward for the contractors paying you.

Common CIS Problems and How to Avoid Them

Contractor not giving you deduction statements

Contractors are legally required to give you a written statement showing the deductions made from each payment. If they are not providing these, chase them. Without statements, you cannot prove the deductions on your tax return.

Wrong deduction rate applied

If a contractor deducts 30 percent instead of 20 percent, it usually means they could not verify your CIS registration. Check that your registration details are correct and give the contractor your correct UTR and NI number.

Contractor deducting CIS from materials

As explained above, CIS should only be deducted from the labour element. If a contractor is deducting from your total invoice including materials, politely point out the error and provide an invoice that clearly separates labour and materials.

Not claiming deductions on your tax return

Some subcontractors forget to claim their CIS deductions when filing their self-assessment. This means they have paid tax twice on the same income. Always include CIS deductions on your return. Read our self-employed tax return guide for the full process.

Frequently Asked Questions

Do I have to register for CIS?

You do not legally have to register, but if you do not, contractors will deduct 30 percent instead of 20 percent from your payments. There is no advantage to not registering, so register as soon as possible.

Does CIS apply to domestic work?

CIS generally does not apply when a homeowner hires a tradesperson directly for work on their own home. It applies when a contractor (someone whose business involves construction) pays a subcontractor for construction work.

Can I get gross payment status?

You can apply for gross payment status if you have annual construction turnover of at least 30,000 (sole trader), have filed all tax returns on time, and have paid all tax and NI on time. It is worth applying once you meet the criteria, as it improves your cash flow significantly.

What happens if I work for both contractors and homeowners?

CIS only applies to work done for contractors. When you work directly for a homeowner, there are no CIS deductions. You simply invoice the homeowner for the full amount and pay your tax through self-assessment as normal.