Construction Industry Scheme (CIS): A Subcontractor's Guide
How does the Construction Industry Scheme work? Under CIS, a contractor takes 20% off a registered subcontractor's labour, or 30% if you have not registered, and pays it to HMRC as an advance towards your Income Tax and Class 4 National Insurance. It is not an extra tax and it is not your final bill. At the end of the tax year you report the total on your Self Assessment return, HMRC sets it against what you owe, and you either pay the shortfall or get a refund. Register, itemise your materials, and keep every deduction statement, and CIS costs you nothing beyond the wait for the money.
What the Construction Industry Scheme is
The Construction Industry Scheme sets the rules for how contractors handle payments to subcontractors for construction work. In HMRC's words, "contractors deduct money from a subcontractor's payments and pass it to HMRC", and "the deductions count as advance payments towards the subcontractor's tax and National Insurance". So CIS is not a second tax on top of Income Tax. It is a withholding system, closer to PAYE for the self-employed, that collects part of your tax bill before you file.
CIS covers most construction work done in the UK: site preparation, demolition, building, alterations and repairs, decorating, and installing systems for heating, lighting, power, water and ventilation. A few trades fall outside it, including architecture and surveying, scaffolding hire where you only supply the scaffolding, carpet fitting, and delivering materials. If your work is on the covered list and a contractor pays you for it, the scheme applies whether or not you signed up for it.
Who is a contractor and who is a subcontractor
You are a contractor if you pay subcontractors for construction work. You also become one, HMRC calls it a "deemed contractor", if your business does not do construction itself but has "spent more than £3 million on construction in the 12 months since you made your first payment", which is how large landlords, retailers and developers get pulled in. You are a subcontractor if you do construction work for a contractor. Plenty of sole traders are both at once: they take work from a main contractor and pay their own labourers, so they deduct CIS on the way out and have it deducted on the way in.
The distinction matters because the two roles carry different duties. A subcontractor's job is mostly to register and then reclaim. A contractor's job is to verify, deduct, report and pay every month, and the penalties for getting that wrong sit with the contractor.
How much CIS is deducted: 20%, 30% or 0%
There are three rates, and which one applies to you depends entirely on whether HMRC can verify you before you are paid.
| Your status | CIS rate on labour | How you get it |
|---|---|---|
| Registered subcontractor | 20% | Register for CIS with your UTR before you start work |
| Not registered | 30% | The default until you register |
| Gross payment status | 0% | Pass HMRC's three qualifying tests (below) |
HMRC is blunt about the cost of not registering: "Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they're not registered." Registering online with your Unique Taxpayer Reference is free and moves you from 30% to 20%. On a £2,000 labour invoice that is the difference between £600 withheld and £400, and you wait until you file to get the extra £200 back. If you have not sorted out a UTR yet, our guide to registering as a sole trader covers that step first.
Materials, VAT and plant hire: what the deduction leaves out
The most expensive misunderstanding in CIS is thinking the rate applies to the whole invoice. It does not. The deduction applies only to the labour. Before working out the 20% or 30%, the contractor must strip out the parts of the payment that are not labour. Per gov.uk, those are the cost of materials you paid for directly, VAT, "consumable stores", "fuel used, except for travelling", "equipment hired for this job ('plant hire')", and the cost of manufacturing or prefabricating materials.
That makes how you write your invoice a cash-flow decision. Show the materials as a separate line and the deduction shrinks, but bury them in one figure and the contractor deducts on the lot.
| £5,000 invoice, £1,000 of materials | Materials itemised | Materials not shown |
|---|---|---|
| Amount CIS applies to (labour) | £4,000 | £5,000 |
| Deduction at 20% (registered) | £800 | £1,000 |
| You receive | £4,200 | £4,000 |
Itemising the £1,000 of materials keeps £200 in your account now rather than months later when you file. The gap widens if you have not registered: at 30% on the £4,000 of labour the deduction is £1,200, so you receive £3,800, a full £400 less than the registered subcontractor takes home on the same job. The catch is proof. To defend the materials figure you need the receipts that show what you paid for them, which is exactly the record CIS assumes you are keeping. Our guide to self-employed expenses in the UK explains which of those costs are allowable against your profit as well.
Gross payment status: getting paid in full
If deductions strangle your cash flow, you can apply to be paid gross, with 0% withheld, and settle all your tax and National Insurance at the year end instead. HMRC grants gross payment status only if your business passes three tests: a business test (you do construction work in the UK and run the business through a bank account), a compliance test (you have "paid your tax and National Insurance on time in the past"), and a turnover test.
The turnover test is the one with the numbers. Ignoring VAT and the cost of materials, your net construction turnover in the last 12 months must be at least:
| Business type | Turnover needed (net of VAT and materials) |
|---|---|
| Sole trader | £30,000 |
| Partnership | £30,000 for each partner, or £100,000 for the whole partnership |
| Company | £30,000 for each director, or £100,000 for the whole company |
Gross status is worth having when your margins are thin and 20% off every payment would leave you short before the reclaim comes through. HMRC reviews it each year and can withdraw it if you start paying or filing late, so it rewards a clean compliance record.
How to claim your CIS deductions back
For a sole trader or partnership, CIS is reconciled through Self Assessment. Add up every deduction contractors made between 6 April and 5 April, then, per HMRC, "send in your Self Assessment tax return as usual", recording your total pay before deductions as income and the CIS deductions separately. These go on the self-employment pages, SA103S or SA103F. HMRC then "work out how much tax you owe and take off any deductions taken by contractors".
Because CIS often withholds more than a sole trader ends up owing, a refund is common. Take a subcontractor whose 2025/26 profit produces a combined Income Tax and Class 4 National Insurance bill of £5,600. Contractors withheld £6,400 across the year. The £6,400 is set against the £5,600, so HMRC refunds the £800 difference rather than asking for a penny. Had the bill instead been £6,900, the £6,400 would cover most of it and only the remaining £500 would be due by 31 January 2027. Either way the withheld money comes back to you, set against your bill rather than kept by HMRC. For where Class 4 fits in that bill, see our guide to self-employed National Insurance.
Limited company subcontractors follow a different route: you set off your CIS deductions against the PAYE and other amounts your company owes each month through an Employer Payment Summary, and claim any excess back at the year end.
A contractor's monthly routine
If you pay subcontractors, CIS is a monthly cycle, not a one-off. Each period you must:
- Verify every new subcontractor with HMRC so you deduct at the right rate. Get an unverified subcontractor wrong and you deduct 30% by default.
- Deduct the correct amount from labour only, leaving out materials and the other excluded costs above.
- Give a payment and deduction statement to each subcontractor "within 14 days of the end of each tax month". The tax month runs from the 6th to the 5th, so a payment made in the 6 May to 5 June month needs a statement by 19 June. This statement is the subcontractor's evidence for their reclaim.
- File your monthly return with HMRC "by the 19th of every month". If you paid no subcontractors that month you still file a nil return.
- Pay HMRC the deductions "every month by the 22nd (or the 19th if you're paying by post)".
Missing the return deadline triggers an automatic penalty that starts at £100 for being one day late, rises to £200 at two months, and reaches £300 or 5% of the deductions (whichever is higher) at six months. Those stack per late return, so a contractor who forgets for a quarter faces several at once.
How SparkReceipt keeps your CIS records straight
CIS turns on paperwork you have to be able to produce: the receipts that justify each materials figure, the deduction statements that back your reclaim, and a clean split between labour and everything else. Rebuilding all that in January is where the mistakes and the missed refunds happen.
SparkReceipt scans receipts and invoices with AI and reads the supplier, date, net, VAT and line items off each one, so the materials you buy on a job are captured as you go instead of reconstructed at year end. You can file the payment and deduction statements from each contractor alongside them, keeping the evidence for your reclaim in one place. Its expense reports total spending by category, which is what you hand your accountant to work out taxable profit and the CIS deductions to enter on the return, and everything stays in line with HMRC's record-keeping rules. You can start on the free plan and see the pricing plans as your job count grows.
Frequently asked questions
Is CIS an extra tax? No. A CIS deduction is an advance payment towards your Income Tax and Class 4 National Insurance. It reduces what you have to pay at the year end, and if contractors withheld more than you owe, HMRC refunds the excess.
Do I have to register as a CIS subcontractor? You are not forced to, but if you do not register, contractors must deduct 30% instead of 20%. Registering with your UTR is free and cuts the withholding by a third, so almost every subcontractor registers.
Does CIS come off my materials as well as my labour? No. The deduction applies only to labour. Contractors must leave out materials you paid for, VAT, plant hire, consumable stores, and fuel used for anything other than travelling, provided those costs are shown on the invoice.
How do I get my CIS deductions back? Sole traders and partnerships reclaim through their Self Assessment return: report the pay you received before deductions and the deductions separately, and HMRC sets the deductions against your tax bill. Limited companies set them off against their PAYE bill through an Employer Payment Summary.
What is gross payment status? It lets a subcontractor be paid in full with no CIS deducted, settling all tax and National Insurance at the year end. You qualify by passing HMRC's business, turnover and compliance tests, including net construction turnover of at least £30,000 for a sole trader.
When are CIS monthly returns due? A contractor must file the CIS monthly return by the 19th of every month, give each subcontractor a deduction statement within 14 days of the tax month end, and pay HMRC by the 22nd (or the 19th if paying by post).
Key takeaways
- CIS is a withholding system, not a new tax. Deductions are advance payments towards your Income Tax and Class 4 National Insurance, reconciled when you file.
- The rate is 20% if you register, 30% if you do not, and 0% with gross payment status. Registering with your UTR is free and the cheapest way to keep more cash in hand each month.
- The deduction hits labour only. Materials, VAT, plant hire, consumable stores and non-travel fuel come out of the sum first, so itemising materials on your invoice directly cuts what is withheld.
- Sole traders reclaim through Self Assessment, reporting gross pay and CIS deductions separately; because CIS often overshoots the final bill, a refund is common.
- Gross payment status removes the deduction for subcontractors who pass the business, turnover (£30,000 net for a sole trader) and compliance tests.
- Contractors run a monthly cycle: verify, deduct, issue statements within 14 days, file by the 19th and pay by the 22nd, with penalties from £100 for a late return.