Can I employ staff as well as pay subcontractors under CIS?

At Towerstone Accountants we provide specialist CIS accountancy services for contractors, subcontractors, and construction businesses across the UK. We created this webpage for people working in construction who want clear guidance on CIS, including registration, deductions, refunds, and common compliance tasks, without jargon. Our aim is to help you stay compliant with HMRC, avoid costly errors, and keep your records in good order.

This is one of the most common questions I am asked by construction business owners, especially those who are growing beyond one or two jobs at a time, because as work picks up the lines between employees and subcontractors start to blur, people are taken on to help meet demand, labour is brought in for specific jobs, and suddenly there is uncertainty about what is allowed, what HMRC expect, and whether mixing PAYE employees with CIS subcontractors is going to cause problems.

The short answer is yes, you absolutely can employ staff and also pay subcontractors under the Construction Industry Scheme at the same time, there is nothing unusual or incorrect about doing both, in fact many well run construction businesses operate exactly this way, the issue is not whether you can do it but whether each worker is treated correctly, taxed correctly, and classified correctly for HMRC purposes.

In my experience most CIS problems do not arise because a business has both employees and subcontractors, they arise because someone who should be treated as an employee is paid under CIS, or because payroll and CIS are not being managed separately and clearly, this article is about helping you understand how the two systems sit side by side, when each applies, how to stay compliant, and where businesses usually trip up.

Understanding the difference between employees and subcontractors

Before looking at whether you can have both it is important to be clear on the difference between an employee and a subcontractor, because HMRC do not allow you to choose whichever is cheaper or more convenient, status is based on the reality of the working arrangement.

An employee works under a contract of employment, they are paid through payroll, income tax and National Insurance are deducted under PAYE, and the employer has responsibilities such as employer’s National Insurance, holiday pay, statutory sick pay, and pension auto enrolment where applicable.

A subcontractor under CIS is usually self employed, they invoice for their work, the contractor deducts CIS tax from the labour element of the invoice and pays it to HMRC, and the subcontractor is responsible for their own tax affairs, expenses, and National Insurance through Self Assessment.

The key point here is that employees and subcontractors are taxed differently because they work differently, the systems are designed to reflect that difference.

Yes, you can have employees and CIS subcontractors at the same time

There is no restriction in UK tax law that says a construction business must choose between employing staff or using subcontractors, you can do both at the same time, and many businesses do.

A common structure I see is a core team of employed staff who provide continuity, supervision, or specialist skills, supported by subcontractors who are brought in for specific trades, projects, or periods of high demand.

From HMRC’s perspective this is perfectly acceptable provided:.

• Employees are paid through PAYE

• CIS subcontractors are correctly verified and reported

• No one is misclassified

Problems only arise when the lines are crossed.

When PAYE applies and when CIS applies

PAYE applies when you employ someone, CIS applies when you pay a subcontractor for construction work, the two systems operate independently even though both involve deductions paid to HMRC.

You might run a monthly payroll for your employees while also submitting a monthly CIS return for your subcontractors, these are separate processes with separate reporting requirements, deadlines, and records.

It is very important not to confuse the two, for example you cannot pay someone under CIS just because they are paid weekly or because they submit invoices, and you cannot pay an employee under CIS to avoid employer National Insurance, HMRC are very clear on this.

The biggest risk is employment status, not CIS itself

The biggest compliance risk when employing staff and paying subcontractors is employment status, HMRC look at the reality of the working relationship, not the label you apply.

If someone is treated like an employee but paid under CIS HMRC may reclassify them as an employee, this can lead to:.

• Backdated PAYE and National Insurance

• Employer’s National Insurance liabilities

• Penalties and interest

• Issues with holiday pay and employment rights

This is where many construction businesses get caught out, often unintentionally.

How HMRC decide whether someone is employed or self employed

HMRC look at several factors when deciding status, no single factor is decisive, it is the overall picture that matters.

Key areas HMRC consider include:.

• Control, who decides how when and where the work is done

• Substitution, can the worker send someone else in their place

• Mutuality of obligation, is there an ongoing expectation of work and payment

• Financial risk, does the worker risk their own money

• Integration, are they part of your business or operating independently

A genuine subcontractor usually has more control, can refuse work, may work for multiple contractors, provides their own tools, and takes some financial risk.

An employee is more likely to have set hours, work under direction, use company equipment, and be integrated into the business.

Common scenarios where businesses mix employees and CIS correctly

There are many situations where having both works well and is entirely compliant.

For example you might employ a site manager or supervisor on PAYE to oversee projects and ensure quality and safety, while using CIS subcontractors for trades such as bricklaying plumbing or plastering.

You might employ apprentices or junior staff through PAYE while using experienced subcontractors for specialist work.

You might have office staff on payroll handling admin and accounts while all site labour is subcontracted.

These are all normal commercial arrangements.

Common mistakes I see when businesses get this wrong

The most common mistake is paying long term regular workers under CIS when they really function as employees, for example someone who works full time for one contractor, uses their tools, follows set hours, and has no real independence.

Another common issue is moving people between PAYE and CIS without changing the underlying working arrangement, HMRC see this as a red flag.

I also see confusion where businesses deduct CIS from someone who should be on PAYE simply because they are self employed elsewhere, that does not matter, status depends on the relationship with you.

Running payroll and CIS side by side

From an admin point of view running PAYE and CIS at the same time is manageable provided systems are set up properly.

You will need to:.

• Operate payroll for employees with RTI submissions

• Register for CIS as a contractor

• Verify subcontractors before paying them

• Submit monthly CIS returns

• Pay PAYE and CIS deductions to HMRC

Keeping payroll records and CIS records clearly separated makes life much easier, mixing them is where errors creep in.

Most accounting software supports both payroll and CIS reporting which reduces the admin burden significantly.

National Insurance differences between employees and subcontractors

One of the reasons HMRC focus so heavily on classification is National Insurance.

Employees attract employer’s National Insurance which is a real cost to the business, subcontractors do not, this creates an incentive to use CIS incorrectly, which is exactly why HMRC monitor it closely.

Subcontractors pay their own National Insurance through Self Assessment, employees do not have that choice.

Trying to avoid employer’s National Insurance by using CIS is one of the quickest ways to attract HMRC attention.

What about directors and family members

Directors of limited companies are usually paid through PAYE, even if the company operates under CIS as a contractor, directors are not paid under CIS.

Family members working in the business are also usually employees, paying them under CIS is rarely appropriate unless they are genuinely operating as independent subcontractors, which is uncommon.

This is another area where well intentioned businesses sometimes make mistakes.

How CIS and PAYE affect cash flow differently

Employees are paid net of PAYE and National Insurance, subcontractors are paid net of CIS deductions, both affect cash flow but in different ways.

CIS deductions reduce the amount paid to subcontractors immediately, whereas employer’s National Insurance increases the cost of employing staff.

Understanding these differences helps when pricing work and planning margins, particularly as a business grows.

What HMRC expect to see in a compliant business

HMRC expect to see clear separation between employees and subcontractors, consistent treatment, proper records, and timely reporting.

If they review your business they will look at contracts invoices working practices payroll records and CIS returns, inconsistencies are what trigger deeper investigations.

In my experience businesses that understand the rules and apply them consistently rarely have serious issues.

Should you review your workforce structure as you grow

As businesses grow it is often sensible to review whether your mix of employees and subcontractors still makes sense.

Some businesses start heavily reliant on subcontractors and gradually bring key roles in house, others do the opposite, there is no one size fits all answer, but the tax and compliance implications should always be part of the decision.

Making changes proactively is far easier than reacting after HMRC raise questions.

Final thoughts from experience

Yes, you can employ staff and pay subcontractors under CIS at the same time, it is common, legitimate, and often the most practical way to run a construction business.

The real issue is not the mix itself but whether each worker is treated correctly based on how they actually work, getting that right protects you from unexpected tax bills penalties and disputes.

When PAYE and CIS are understood and managed properly they work side by side without issue, when they are misunderstood they become a source of stress and risk, and that difference usually comes down to taking the time to get the structure right from the start.

You may also find our guidance on how does cis work and what is cis payroll helpful when dealing with related CIS questions. For a broader overview of CIS rules, compliance, and support, you can visit our cis guidance hub.