What Is a CIS Deduction

Learn what a CIS deduction is, how it's calculated, and how subcontractors and contractors manage deductions under the Construction Industry Scheme.

What Is a CIS Deduction?

If you work in the UK construction industry as a subcontractor or contractor, you may have heard the term CIS deduction used when discussing payments and tax. But what does it actually mean?

A CIS deduction refers to the tax withheld from payments made to subcontractors under the Construction Industry Scheme (CIS). These deductions are paid directly to HMRC and count as advance payments towards the subcontractor's tax and National Insurance liabilities. In this guide, we explain how CIS deductions work, who they apply to, how they are calculated, and what subcontractors need to know to manage their tax correctly.

What Is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme is a system operated by HMRC that regulates how payments are made from contractors to subcontractors in the construction sector. Its aim is to prevent tax evasion by ensuring that tax is collected at source from subcontractors.

Under the scheme:

  • Contractors deduct tax from subcontractors' pay

  • These deductions are passed to HMRC

  • Subcontractors later declare their total income and tax through Self Assessment or Corporation Tax returns

  • The deductions are offset against their final tax bill

What Is a CIS Deduction?

A CIS deduction is the amount a contractor withholds from a subcontractor’s payment and sends to HMRC. This deduction is a fixed percentage of the labour portion of the invoice, and it does not apply to the cost of materials or VAT.

The rate of deduction depends on the subcontractor’s registration status:

  • 20 per cent for subcontractors registered with CIS

  • 30 per cent for subcontractors who are not registered

  • 0 per cent (gross payment status) for subcontractors approved to receive full payment with no deduction

CIS deductions are not a tax in themselves but an advance contribution towards your tax bill. They are applied before the payment is made to the subcontractor and appear on deduction statements issued by the contractor.

Example of a CIS Deduction

Imagine a subcontractor invoices a contractor as follows:

  • Labour: £1,000

  • Materials: £500

  • VAT (20%): £300

  • Total invoice: £1,800

If the subcontractor is registered with CIS and qualifies for the 20 per cent deduction, the contractor deducts 20 per cent from the labour portion only:

  • 20 per cent of £1,000 = £200

  • Payment to subcontractor = £1,800 minus £200 = £1,600

  • The contractor sends £200 to HMRC on behalf of the subcontractor

The subcontractor receives a payment and deduction statement showing the breakdown. These statements are important for claiming back tax or reconciling the final tax return.

When Do Contractors Make CIS Deductions?

Contractors must verify each subcontractor with HMRC before making a payment. HMRC then confirms which deduction rate to use. The contractor is legally required to:

  • Deduct the correct rate from labour costs

  • Submit monthly CIS returns to HMRC

  • Pay the deducted amounts by the 22nd of each month (if paying electronically)

  • Provide a deduction statement to each subcontractor every month

Failing to do this correctly can result in fines and penalties for the contractor.

How Subcontractors Reclaim CIS Deductions

CIS deductions are not the final tax bill. Subcontractors must complete a Self Assessment tax return (if self-employed) or Corporation Tax return (if operating as a limited company).

  • Sole traders include the total CIS deducted in their tax return. HMRC calculates the tax owed and either issues a refund or reduces the bill accordingly

  • Limited companies reclaim CIS deductions through their PAYE system. If the deductions exceed their PAYE liabilities, they can apply to HMRC for a repayment at the end of the tax year

Keeping detailed records and saving all deduction statements is essential for ensuring the correct amount is reclaimed.

How to Avoid 30 Per Cent Deductions

Subcontractors who are not registered with HMRC under CIS will automatically have 30 per cent of their labour payments deducted. To avoid this, you should:

  1. Register for CIS as a subcontractor via HMRC

  2. Provide your Unique Taxpayer Reference (UTR) to the contractor

  3. Keep your registration details up to date

Registering is free and can significantly improve your cash flow by reducing unnecessary deductions.

Gross Payment Status

Some subcontractors can apply for gross payment status, meaning no CIS deductions are made at all. To qualify, you must:

  • Have a clean tax record (no late payments or returns)

  • Meet HMRC’s turnover thresholds (typically £30,000 for sole traders or £100,000 for limited companies with multiple directors)

  • Operate a UK-based business with a business bank account

With gross payment status, you receive full payment from contractors and pay all tax through your end-of-year returns.

Final Thoughts

A CIS deduction is the tax withheld from a subcontractor’s labour payments by a contractor and sent to HMRC. These deductions ensure that tax is collected at source and contribute towards the subcontractor’s annual tax bill.

By registering with HMRC and keeping accurate records, subcontractors can avoid higher deductions and ensure they reclaim any overpaid tax. For contractors, staying on top of CIS responsibilities is essential for compliance and avoiding penalties.

Understanding how CIS deductions work helps both parties manage cash flow, remain tax compliant and build trusted business relationships.