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

If you run a construction business, you may need both employees and subcontractors to complete projects efficiently. Many small and medium-sized contractors use a mix of both, especially when workloads fluctuate or specialist skills are needed.

Yes, you can employ staff and also pay subcontractors under the Construction Industry Scheme (CIS). However, each relationship must be handled correctly. Employees are paid through PAYE (Pay As You Earn), while subcontractors are paid under CIS, with tax deducted before payment.

This article explains how to manage both systems correctly, the differences between employees and subcontractors, and how to stay compliant with HMRC.

Understanding the difference between employees and subcontractors

Before you can pay someone under PAYE or CIS, you must determine whether they are an employee or a subcontractor. HMRC focuses on the nature of the working relationship, not just what the contract says.

Employees typically:

• Work regular hours under your direction.

• Use your tools and materials.

• Are paid a fixed wage or salary.

• Receive employment benefits such as holiday pay and pensions.

Subcontractors generally:

• Work independently or for multiple clients.

• Provide their own tools and equipment.

• Control how and when they work.

• Invoice you for the work completed.

If you treat a worker like an employee but pay them as a subcontractor, HMRC could reclassify them as employed, leading to unpaid tax and National Insurance liabilities.

Paying employees through PAYE

When you hire staff, you must register as an employer with HMRC and set up a PAYE system to handle tax and National Insurance contributions.

As an employer, you are responsible for:

• Deducting Income Tax and employee National Insurance from wages.

• Paying employer’s National Insurance.

• Enrolling eligible employees into a workplace pension scheme.

• Providing payslips and maintaining payroll records.

Employees are entitled to statutory rights such as holiday pay, sick pay, and redundancy protection.

Paying subcontractors under CIS

If you hire self employed workers or limited companies to carry out construction work, they are treated as subcontractors under the Construction Industry Scheme.

As a contractor, you must:

1. Register for CIS with HMRC.

2. Verify each subcontractor’s CIS status before making payments.

3. Deduct the correct rate of tax (usually 20% for registered subcontractors or 30% if unregistered).

4. Submit monthly CIS returns showing payments and deductions.

5. Provide subcontractors with payment and deduction statements.

The deductions you make are sent to HMRC as advance tax for the subcontractor, which they claim back or offset when completing their Self Assessment tax return.

Can you run PAYE and CIS at the same time?

Yes. Many construction businesses operate both PAYE and CIS systems simultaneously. You may employ certain people directly (such as site managers or admin staff) while hiring subcontractors for specific jobs.

However, you must keep the two systems separate:

• PAYE applies to employees.

• CIS applies to subcontractors.

Each month, you must file separate returns: a CIS return for subcontractors and a Full Payment Submission (FPS) for employees through payroll.

How to register for both PAYE and CIS

To manage both employees and subcontractors correctly, you need to:

1. Register as an employer with HMRC to operate PAYE.

2. Register as a contractor under CIS to pay subcontractors.

3. Use HMRC-recognised software (such as Sage, QuickBooks, or Xero) to manage payroll and CIS submissions.

Your accountant can help you register and set up both systems correctly to avoid errors and penalties.

Tax and accounting responsibilities

When managing both PAYE and CIS, you are responsible for:

• Keeping accurate records of wages, deductions, and payments.

• Paying PAYE and National Insurance to HMRC monthly or quarterly.

• Paying CIS deductions to HMRC by the 22nd of each month.

• Providing employees with payslips and subcontractors with deduction statements.

• Submitting accurate returns on time.

It’s vital to separate employee wages from subcontractor invoices in your accounts. This ensures accurate reporting and makes it easier to calculate Corporation Tax and VAT.

Employment status checks

If you are unsure whether someone should be treated as an employee or subcontractor, you can use HMRC’s Check Employment Status for Tax (CEST) tool.

By answering a series of questions about the working relationship, the tool helps determine whether PAYE or CIS applies. Keep a copy of the result as evidence in case of an HMRC enquiry.

Common mistakes to avoid

• Incorrect worker classification: Paying employees under CIS can lead to penalties.

• Missing CIS returns: Failing to file monthly CIS returns can result in automatic fines.

• Not verifying subcontractors: Always check each subcontractor’s CIS status before payment.

• Poor record keeping: Keep contracts, invoices, and payment evidence for at least six years.

• Mixing systems: Do not pay employees through CIS or vice versa.

Avoiding these errors protects your business from compliance issues and financial penalties.

How accountants help manage PAYE and CIS

An accountant experienced in the construction sector can help you manage both systems efficiently by:

• Registering your business for PAYE and CIS.

• Running payroll and handling tax deductions.

• Submitting monthly CIS returns and FPS reports.

• Keeping records compliant with HMRC rules.

• Advising on employment status and contract structures.

Professional support ensures you stay on top of deadlines, pay the right amount of tax, and avoid costly HMRC investigations.

The bottom line

You can absolutely employ staff and pay subcontractors under CIS at the same time, as long as you operate PAYE for employees and CIS for subcontractors. The key is to correctly classify each worker, maintain accurate records, and file both PAYE and CIS returns on time.

Managing both systems can be complex, but with good accounting software and professional guidance, you can stay compliant, pay your team correctly, and focus on running a successful construction business.