CIS deductions explained, for subcontractors and contractors
Last reviewed 12 September 2026
CIS is not a tax. It is a payment on account, taken at source, and the amount you get back depends entirely on the records you keep at the time.
This is general information, not tax advice. The Construction Industry Scheme governs how contractors pay subcontractors in UK construction, and both sides of the arrangement carry duties under it.
What CIS actually does
When a contractor pays a subcontractor for construction work, it must deduct a percentage from the payment and send that money to HMRC. The deduction counts towards the subcontractor's own tax and National Insurance for the year. It is money taken in advance, not an extra tax, and most subcontractors get part of it back.
The three rates
- 20 per cent, for subcontractors registered under CIS. This is the normal case.
- 30 per cent, for subcontractors who are not registered, or whose details the contractor cannot verify against HMRC's records.
- 0 per cent, for subcontractors with gross payment status, who are paid in full and settle their own tax later.
The gap between 20 and 30 per cent is why registering matters so much. On 40,000 pounds of labour in a year, being unverified costs 4,000 pounds of cash flow, recoverable eventually but gone in the meantime.
What the deduction is taken from
The deduction applies to the labour element only. It is not taken from:
- Materials the subcontractor has genuinely paid for, at cost.
- VAT charged on the invoice.
- Plant hire paid for by the subcontractor from a third party, and consumable stores.
- CITB levy, where it applies.
So the invoice has to separate labour from materials, plainly, or the contractor will deduct from the whole figure. A subcontractor invoice showing a single lump sum for supply and fix is a subcontractor invoice that loses money.
A worked deduction
An invoice for 3,000 pounds of labour and 1,200 pounds of materials, with VAT under the reverse charge so no VAT is added. The deduction at 20 per cent applies to the 3,000 pounds only, which is 600 pounds. The contractor pays 3,600 pounds and sends 600 pounds to HMRC on the subcontractor's account.
What a contractor has to do
- Register as a contractor before the first payment to a subcontractor.
- Verify every new subcontractor with HMRC before paying them, and use the rate HMRC returns.
- File a monthly CIS return by the 19th of the month, covering the tax month to the 5th, even when there is nothing to report (file a nil return).
- Give every subcontractor a payment and deduction statement within 14 days of the end of the tax month.
- Pay the deductions over to HMRC by the 22nd if paying electronically.
Late monthly returns attract automatic penalties that start at 100 pounds and escalate, so a forgotten nil return is a genuinely expensive piece of admin.
What a subcontractor should do
Register under CIS before the first job. Split labour and materials on every invoice. Keep every payment and deduction statement, because they are the evidence for the reclaim and a contractor who has gone quiet will not reissue them a year later.
Sole traders reclaim through the Self Assessment return: the CIS deducted for the year is set against the tax due, and the balance is repaid. Limited companies offset CIS deductions suffered against PAYE, National Insurance and CIS liabilities through the payroll scheme, and claim any remainder after the tax year ends.
Gross payment status
Gross payment status removes the deduction entirely, which transforms cash flow on labour-heavy work. To get it a business has to pass three tests: the business test (the work is construction, carried on largely through a bank account in the United Kingdom), the turnover test, and the compliance test, which means filing and paying everything on time. HMRC reviews the status, and losing it for a late payment is a real risk worth managing.
Whether the work is even in CIS
Most construction operations are covered: preparation, alterations, repairs, demolition, installation of systems, and finishing. Some things are not, including professional services such as architecture and surveying, carpet fitting, delivery of materials, and the manufacture of components off site. If you are not sure whether a package is in or out, check before the first payment rather than after the monthly return.
More guides
- How to price a building job so it still makes money
- Quote or estimate: the difference that decides who pays for the overrun
- What a quote must include to be safe in the UK
- How to work out your true hourly rate
- Exclusions and assumptions: the two lists that protect your price
- VAT for UK trades, and the domestic reverse charge
- Payment terms, deposits and staged payments
- Variations and extras: how to get paid for work outside the quote
- Why quotes get rejected, and eight fixes that win more of them
- Domestic versus commercial: what changes in the way you quote
- Chasing late payment without losing the customer
Write the quote itself in a couple of minutes
BidReady turns the answers to a short set of questions into a professional quotation with the scope, the exclusions and the terms already in it. Write your first quote free, or see how it works.
This guide is general information for UK trades, written by the BidReady team. It is not legal, tax or financial advice. Rules change and individual circumstances differ, so take professional advice before acting on anything that matters.