How Does CIS Work If I Am Also PAYE

The construction industry has its own tax system and for many people it feels more complicated than it needs to be. Plenty of tradespeople find themselves caught between two roles. They work as a subcontractor under the Construction Industry Scheme so contractors deduct CIS tax from their payments. At the same time they also have a PAYE job on the side or work as an employee for part of the year. When both systems apply at once it can be confusing to understand how your tax is worked out and what you need to do at the end of the tax year.

In my opinion this is one of the most misunderstood areas in construction. People often assume that CIS and PAYE operate separately or that the tax from one cancels out the other. In reality both systems feed into the same final calculation. Your tax is always based on your total income for the year regardless of whether you earned it as an employee or as a subcontractor. CIS simply collects some of that tax up front. PAYE collects some of it in a different way. At the end of the year HMRC totals everything and then works out whether you have overpaid or underpaid.

This guide explains exactly how CIS works when you also have PAYE income, what HMRC does with each type of tax deduction, how refunds work, how the tax return pulls everything together, and why people in this situation often receive large refunds even when they assumed everything had been paid already.

Understanding the Difference Between PAYE and CIS

The simplest place to start is understanding the two systems. PAYE is the system used when you are an employee. Your employer takes Income Tax and National Insurance straight from your wages before paying you. Your tax code determines how much tax is deducted. Most of the time PAYE ensures you pay the right tax as you go.

CIS works differently. When you are a subcontractor the contractor pays you for your labour but must deduct CIS tax at 20 percent or 30 percent depending on your status. This is not the final tax bill. It is simply an advance payment towards the tax you will eventually owe. CIS deductions do not take your tax code into account. They do not consider your personal allowance or whether you have any PAYE income. They are a flat percentage taken off the top.

This is where confusion begins. CIS does not care how much tax you have already paid under PAYE and PAYE does not consider any CIS that has been deducted. The two systems only meet when you file your Self Assessment tax return.

Why You Must File a Tax Return When You Have CIS and PAYE

If you work under CIS at any time during the tax year you must file a Self Assessment tax return. This is because HMRC needs to review your business income, deduct your expenses, and calculate how much of your CIS deductions count towards your final tax position.

Even if you also worked under PAYE for part of the year this does not remove the Self Assessment obligation. PAYE income still needs to be entered on the tax return so HMRC can calculate your total income for the year. Many subcontractors assume they do not need a tax return because their PAYE job already deducts tax or because the contractor has already taken CIS. Unfortunately it does not work that way. HMRC needs the full picture before it can settle your tax.

In my opinion filing a tax return is not just a legal requirement but also a financial opportunity. Many subcontractors claim expenses for tools, travel, safety gear, insurance, and other costs that reduce taxable profit. PAYE employees often cannot claim these in the same way. This is why many people who work under both systems end up with refunds.

How HMRC Calculates Your Final Tax When You Have CIS and PAYE

The key to understanding this situation is HMRC’s calculation method. They start by adding all your income together. That includes CIS income, PAYE wages, overtime, bonuses, and any other taxable income. They then deduct your allowable business expenses from your CIS income because your subcontractor income is treated as self employed profit. After this they apply your personal allowance and tax bands to the combined income.

Once they know how much tax you owe for the year they subtract the tax you have already paid under PAYE and the tax deducted under CIS. Whatever is left becomes either your refund or your shortfall.

This is why CIS subcontractors with PAYE income often receive large refunds. CIS deductions are taken from the full amount without deducting expenses and without considering your tax code or personal allowance. PAYE also collects tax separately. When HMRC runs the combined calculation it often becomes clear that too much has been paid.

It can also work the other way. If your PAYE job pushed you into higher rate tax or if your subcontractor profit was high you might still owe additional tax. This is why a tax return is essential.

An Example of How CIS and PAYE Work Together

Examples help make the process easier to understand. Imagine you earned £20,000 from a PAYE job and £18,000 as a CIS subcontractor. The contractor deducted CIS at 20 percent which equals £3,600. Under PAYE your employer already deducted the correct tax based on your tax code.

When you file your tax return HMRC totals your income to £38,000. They then allow you to deduct your subcontractor expenses. Suppose you spent £3,000 on tools, fuel, safety equipment, and work wear. Your taxable subcontractor profit becomes £15,000. Your total taxable income is now £35,000 which sits comfortably within basic rate tax.

When HMRC applies the tax calculation they then subtract the PAYE tax already deducted and the CIS tax already deducted. Because CIS did not take your expenses into account and because the deduction was higher than your tax liability on that income you end up with a refund.

This example is simplified but it reflects the experience of thousands of construction workers every year.

How National Insurance Works When You Have Both CIS and PAYE

National Insurance operates differently from Income Tax. When you are employed you pay Class 1 National Insurance. When you work under CIS you are treated as self employed which means you pay Class 2 and Class 4 National Insurance through your tax return. The PAYE system does not consider your CIS work and CIS does not consider your PAYE work.

This means your NI is calculated separately in each system. You may pay Class 1 through your employer and Class 2 and Class 4 through your tax return. This can feel strange at first but it is simply the way the system works. The important thing to understand is that this is normal. It does not mean you are being double charged for the same income. Each class applies to a specific type of work.

In my opinion this is where accountants provide significant value because many subcontractors misunderstand NI and assume something is wrong. When it is explained properly the calculations make sense.

Claiming CIS Refunds When You Also Have PAYE

For most subcontractors the biggest benefit of working under both systems is the possibility of a refund. Because CIS is deducted from turnover before expenses many subcontractors pay more tax than they owe. PAYE income exaggerates this effect because the personal allowance may have already been used through your PAYE job and your CIS deductions do not reflect that.

When you file your tax return you can claim your refund through Self Assessment. HMRC will either pay the refund directly into your bank account or offset it against any other taxes you owe. Refunds usually take one to three weeks after processing although some take longer if HMRC needs to perform additional checks.

In my opinion subcontractors should file early each year because CIS refunds tend to slow down during peak months and HMRC checks increase when they receive a high volume of similar claims.

What Happens If You Do Not Notified HMRC You Are a Subcontractor

If you work under CIS you are considered self employed even if you also have a PAYE job. This means you must register for Self Assessment. If you fail to register HMRC may still receive information from contractors because they submit monthly CIS returns with your details. HMRC will then expect a tax return and may issue penalties for late registration and late filing.

Registering early prevents penalties and ensures you receive credit for your CIS deductions. Without registering those deductions may sit unused and HMRC cannot refund them to you.

Keeping Records When You Work Under Both Systems

Record keeping becomes especially important when you move between PAYE and CIS work. You need to keep evidence of your CIS earnings, your CIS deductions, your expenses, and your PAYE wages. CIS deductions are shown on monthly CIS statements that contractors must provide. PAYE income is shown on payslips and your P60.

If you lose CIS statements your accountant can often reconstruct your deductions using information from the contractor or from the monthly CIS submissions. HMRC may also be able to verify figures but it is always better to keep your own copies.

In my opinion subcontractors who keep receipts for fuel, tools, repairs, insurance, training, protective clothing, and materials benefit most because these expenses reduce taxable profit and increase refunds.

When You Might Owe Additional Tax Instead of Receiving a Refund

Not everyone receives a refund. You might owe tax if your subcontractor profit was unusually high, if your PAYE job moved you into higher rate tax, or if you did not have many allowable expenses to offset your CIS income. You may also owe additional National Insurance because working as both an employee and a subcontractor triggers different classes of NI.

Another reason you might owe tax is if your CIS deduction rate was 30 percent because you were not verified with HMRC. In that situation the deduction is higher but it does not automatically cover your total liability. Once HMRC calculates your combined tax position you may still owe money.

This is why you should not rely solely on CIS deductions to cover your tax. The final calculation always depends on your total income and expenses.

What Happens If You Also Employ Subcontractors

Some workers find themselves acting as both subcontractors and contractors. You might work under CIS for one company while hiring subcontractors for your own jobs. In this situation you still file your own tax return for your CIS and PAYE income but you must also operate CIS on payments you make to your subcontractors.

This means you must register as a contractor, verify your subcontractors, deduct CIS from their payments, and submit monthly CIS returns. The CIS you deduct from them does not affect your personal tax. It is simply compliance for the subcontractors you hire.

This dual role can be complex so many people ask an accountant to manage the CIS reporting on their behalf.

Why an Accountant Helps When You Have CIS and PAYE Together

When you work under both systems your tax position becomes more complex than average. An accountant can check your CIS statements, calculate your subcontractor profit correctly, ensure expenses are claimed properly, verify your PAYE figures, and produce an accurate tax return. They can also help identify whether you are owed a refund or whether extra tax must be paid.

This is especially helpful when you have irregular work, gaps in employment, or multiple contractors. Many people who try to file without support either underclaim expenses or misreport income which delays refunds and creates HMRC queries.

In my opinion the cost of an accountant is often outweighed by the refund generated because many people do not know how much they can claim without professional help.

Final Thoughts

CIS and PAYE work together more closely than most people realise. They are not separate tax systems working in different directions. They both feed into the same final calculation at the end of the tax year. PAYE deducts tax on your wages. CIS deducts tax on your subcontractor turnover. HMRC then reviews everything through your Self Assessment tax return, subtracts your expenses, applies your personal allowance, and works out the final figure.

If you have paid too much you receive a refund. If you have paid too little you pay the balance. The important thing is understanding that being both PAYE and CIS does not complicate your taxes. It simply creates more information for HMRC to combine.

In my opinion the best approach is to keep good records, gather your CIS statements, file your tax return on time, and seek advice if you are unsure. Once you understand how the two systems interact everything becomes clearer and the process becomes far less stressful.