Can I Offset CIS Deductions Against My Tax Bill

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 important CIS questions I deal with, and also one of the most misunderstood. People see money deducted from their invoices month after month and naturally want to know whether that tax is gone for good or whether it actually reduces what they owe later. In some cases I hear people say they have already paid enough tax through CIS and assume they do not need to worry about their return at all, in other cases people fear they are being taxed twice.

The truth sits somewhere in the middle. CIS deductions can be offset against your tax bill, but how this works depends entirely on whether you are a sole trader, a partnership, or a limited company, and also on how well the CIS process has been handled throughout the year.

In this article I am going to explain exactly how CIS deductions interact with your tax bill. I will cover how offsets work in Self Assessment, how they work for limited companies, when refunds arise, why some people still end up with tax to pay, and the common mistakes that cause delays or lost refunds. My aim is that by the end you clearly understand where your CIS deductions go and how to make sure they are actually working in your favour.

What CIS deductions actually represent

The first thing I always explain is that CIS deductions are not a separate tax. They are not a penalty and they are not an additional charge on top of your normal tax.

CIS deductions are tax paid on account. They are taken at source to make sure HMRC receives something upfront from construction income, but they are only an advance payment toward your final tax position.

This distinction matters because it frames how you should think about CIS. The deductions are not the end of the story, they are part of the journey toward your final tax calculation.

How CIS deductions are collected

Under the Construction Industry Scheme, contractors deduct tax from the labour element of payments made to subcontractors. This deduction is normally 20 percent if the subcontractor is registered, or 30 percent if they are not.

The contractor then pays that deducted amount over to HMRC and provides the subcontractor with a CIS deduction statement showing what has been withheld.

Those statements are the evidence that tax has already been paid on your behalf.

Offsetting CIS deductions as a sole trader

If you are a sole trader, CIS deductions are offset through your Self Assessment tax return.

When I prepare a return for a CIS subcontractor, the process is always the same in principle. We declare the full gross income from construction work, we deduct allowable business expenses to arrive at the taxable profit, then we calculate Income Tax and National Insurance on that profit.

Only at that stage do CIS deductions come into play. The total CIS tax deducted during the year is treated as tax already paid and is offset against the total tax and National Insurance bill.

If the CIS deductions are higher than the tax due, a refund arises. If they are lower, there is still tax to pay.

Why CIS deductions do not automatically cover your full tax bill

A very common misunderstanding is the belief that 20 percent CIS deductions mean your tax is sorted.

In reality most sole traders pay more than 20 percent in combined tax and National Insurance once profits reach certain levels. Income Tax, Class 2 National Insurance, and Class 4 National Insurance all need to be considered.

This means it is entirely possible to have CIS deductions all year and still owe tax by the 31 January deadline, particularly if profits are strong or if there is other income such as property or employment earnings.

CIS is a prepayment, not a guarantee.

Offsetting CIS deductions for partnerships

For partnerships the principle is similar but the mechanics differ slightly.

CIS deductions suffered by the partnership are allocated between the partners in line with their profit share. Each partner then offsets their share of CIS deductions against their own personal tax bill through their Self Assessment return.

This is an area where clear records matter. If the allocation is wrong it can result in one partner claiming too much and another too little.

Offsetting CIS deductions in a limited company

Limited companies handle CIS deductions very differently.

If a limited company is acting as a subcontractor and suffers CIS deductions, those deductions belong to the company, not to the director personally.

They cannot be offset against the director’s Self Assessment tax bill. Instead they are offset against the company’s Corporation Tax liability or PAYE liabilities.

This is one of the biggest areas of confusion I see, particularly where directors assume CIS deductions reduce their personal tax because they are the ones doing the work.

How CIS deductions reduce Corporation Tax

When a limited company’s Corporation Tax return is prepared, the company’s profits are calculated in the normal way.

The Corporation Tax due is then reduced by any CIS deductions suffered during the accounting period. These deductions are treated as tax already paid by the company.

If the CIS deductions are greater than the Corporation Tax due, the company may be due a refund.

This is why accurate CIS statements are critical. Without them HMRC cannot confirm what has already been paid.

Using CIS deductions against PAYE liabilities

In some cases CIS deductions suffered by a limited company can be set against PAYE liabilities, including PAYE tax and National Insurance owed on staff wages.

This can help with cash flow, but it must be handled carefully and recorded correctly. It is not automatic and requires proper reconciliation.

Where this option is used incorrectly it can create mismatches on HMRC systems, which then take time to unwind.

When CIS refunds arise

CIS refunds are common, particularly in the following situations.

Low profits relative to deductions, high levels of allowable expenses, short trading periods, or companies in early growth stages.

For sole traders refunds usually arise through the Self Assessment process. For limited companies refunds usually arise through Corporation Tax or PAYE offsets.

However refunds are never instant. HMRC will only issue them once the relevant return has been submitted and processed.

Why some CIS refunds are delayed

One of the biggest causes of delayed refunds is missing or incorrect CIS deduction statements.

HMRC relies on contractor submissions to match deductions to subcontractors. If details do not match, names are inconsistent, or statements are missing, HMRC systems cannot reconcile the amounts.

This is why I always advise clients to keep every CIS statement and to check them regularly rather than waiting until year end.

CIS deductions and payments on account

For sole traders CIS deductions also interact with payments on account.

Even if CIS has covered your tax bill for the year, HMRC may still ask for payments on account for the following year based on the previous liability.

This can come as a shock if it is not planned for. In some cases payments on account can be reduced, but only where it is reasonable to do so.

Understanding this interaction avoids nasty surprises.

What happens if CIS deductions are not claimed

If CIS deductions are not included on a tax return they do not automatically get credited later.

For sole traders this means overpaid tax sits with HMRC until the return is corrected. For limited companies it can mean CIS credits remain unused for years.

I regularly see cases where thousands of pounds are effectively left on the table simply because nobody has reviewed the CIS position properly.

CIS deductions and other income

CIS deductions only relate to construction income.

If you have other income sources, such as employment, rental income, dividends, or savings interest, your overall tax bill may be higher than expected.

CIS deductions are offset against the total tax bill, not ring fenced to construction profits alone. This can work in your favour or against you depending on your wider income picture.

The importance of accurate record keeping

Accurate record keeping is the backbone of claiming CIS deductions properly.

You should keep invoices issued, CIS statements received, bank records, and confirmation of payments.

For limited companies this also feeds into bookkeeping and Corporation Tax calculations.

Without good records the offset process becomes slow and stressful.

Common mistakes I see with CIS offsets

There are a few recurring errors.

Claiming CIS deductions personally when they belong to a company, assuming deductions remove the need to file a return, failing to include all deductions, and not understanding why tax is still due.

Most of these issues stem from a lack of explanation rather than deliberate error.

How I help clients make sure CIS deductions are used properly

When I work with CIS clients I focus on making sure every deduction is captured and applied correctly.

I reconcile CIS statements, review contractor records, and check HMRC accounts to ensure nothing is missing.

This approach often uncovers refunds or offsets that clients did not realise were available.

Final thoughts

Yes, you can offset CIS deductions against your tax bill, but only if it is done in the right way and in the right place.

For sole traders and partners this happens through Self Assessment. For limited companies it happens through Corporation Tax or PAYE, not personal tax returns.

From my experience the frustration around CIS almost always comes from misunderstanding rather than the system itself. Once you understand where the deductions go and how they reduce what you owe, CIS becomes far less intimidating.

Handled properly, CIS deductions are not something you lose, they are something you reclaim or use to reduce your tax bill, which is exactly what they are designed to do.

You may also find our guidance on Can I reclaim overpaid CIS tax from HMRC and how to claim your cis refund from hmrc helpful when dealing with related CIS questions. For a broader overview of CIS rules, compliance, and support, you can visit our cis guidance hub.