What Is CIS Tax Deduction

Learn what CIS tax deduction is in the UK, who it applies to, and how it affects payments to subcontractors in construction.

The Construction Industry Scheme (CIS) is a tax system introduced by HMRC to regulate how payments are made to subcontractors working in the construction sector. Under the CIS, contractors are required to deduct tax from payments to subcontractors and pass this directly to HMRC. This deduction is called CIS tax.

CIS tax deductions help ensure that tax is paid on construction income at the time work is done, rather than relying solely on year-end tax returns. It is designed to reduce the risk of tax evasion in a traditionally high-risk industry and applies to most types of construction work carried out in the UK.

This guide explains how CIS tax deductions work, who they apply to, how much is deducted, and what contractors and subcontractors need to do to stay compliant.

Who Does the CIS Apply To?

The CIS applies to most businesses working in the UK construction industry, whether they are sole traders, partnerships or limited companies. There are two main groups:

Contractors
These are businesses that pay other businesses or individuals to do construction work. This can include property developers, builders, or even companies not directly in construction but that spend over £3 million on construction over three years.

Subcontractors
These are individuals or businesses that are paid to carry out construction work for a contractor. They can be self employed sole traders, partnerships or companies.

If you fall into both categories, for example, a company that pays subcontractors and is also paid as a subcontractor, you must register as both a contractor and subcontractor under CIS.

What Types of Work Are Covered?

CIS applies to a wide range of construction-related activities, including:

  • Site preparation and groundwork

  • Building, bricklaying and roofing

  • Decorating and painting

  • Demolition and dismantling

  • Plumbing, heating and electrical work

  • Installing systems such as air conditioning, CCTV or fire alarms

The scheme also covers civil engineering work like road building, as well as cleaning the inside of buildings after construction work is completed.

It does not apply to professional services such as architecture, surveying or delivering materials.

How Does the Deduction Work?

Under CIS, contractors must deduct tax from subcontractors’ payments before they are made. The amount deducted depends on the subcontractor’s registration status with HMRC.

The deduction is made only on the labour portion of the payment. It does not apply to the cost of materials, VAT or certain allowable expenses.

The standard rates are:

  • 20% for registered subcontractors

  • 30% for unregistered subcontractors

  • 0% for subcontractors with gross payment status

For example:

  • Contractor agrees to pay subcontractor £1,000

  • Labour: £800

  • Materials: £200

  • Subcontractor is registered

  • Deduction = 20% of £800 = £160

  • Payment made = £840

  • £160 is sent to HMRC

The contractor must send the deducted amount to HMRC and give the subcontractor a CIS payment and deduction statement, showing what was paid and what was withheld.

Registering for CIS

Contractors must register with HMRC before they take on subcontractors. They need to verify each subcontractor to determine their deduction rate. Verification is done using the subcontractor’s UTR (Unique Taxpayer Reference) and National Insurance number or company details.

Subcontractors can also register voluntarily to avoid the higher 30% deduction. If a subcontractor qualifies and applies for gross payment status, they can receive payments in full without any CIS tax deduction, although they will still be responsible for paying Income Tax or Corporation Tax at the end of the year.

Subcontractors must meet certain criteria for gross payment status, including:

  • Being up to date with tax returns and payments

  • Having a UK business bank account

  • Running their business through a verifiable structure (sole trader, partnership or company)

  • Meeting minimum turnover thresholds

Gross payment status is reviewed annually, and HMRC can remove it if compliance falls behind.

Subcontractors and Self Assessment

For subcontractors who are sole traders or partnerships, CIS deductions are treated as advance tax payments and are offset against their Income Tax and National Insurance when they file their Self Assessment return.

At the end of the tax year:

  • Total CIS deductions are listed on the tax return

  • HMRC compares these against the tax due on total profits

  • If the deductions exceed the tax due, a refund is issued

  • If not, the remaining balance must be paid

Subcontractors should keep all deduction statements provided by contractors and match them to their own records. Mistakes or missing records can delay refunds or cause issues with HMRC.

Limited Companies and CIS

If the subcontractor is a limited company, CIS deductions are applied in the same way, but they are handled through the company’s monthly payroll scheme.

  • The company reports deductions on the Employer Payment Summary (EPS)

  • The amount can be offset against PAYE liabilities such as Income Tax or National Insurance owed for employees

  • If the company’s PAYE bill is lower than the CIS deduction, it can claim a refund from HMRC at year end

Limited companies must remain fully compliant with PAYE reporting and CIS obligations to avoid penalties or delays in reclaiming deductions.

Reporting Requirements for Contractors

Contractors have several important duties under the CIS:

  • Register with HMRC before hiring subcontractors

  • Verify the status of each subcontractor

  • Deduct tax at the correct rate and pay it to HMRC

  • Submit monthly CIS returns by the 19th of each month

  • Provide deduction statements to subcontractors

  • Keep accurate records for at least three years

Late or inaccurate filings can lead to financial penalties and interest. HMRC may also charge fines if deductions are made incorrectly or if subcontractors are not verified before payment.

Common CIS Mistakes to Avoid

Some frequent errors under CIS include:

  • Forgetting to deduct tax from labour costs

  • Applying deductions to VAT or materials (which should not be included)

  • Paying subcontractors gross without proper authorisation

  • Failing to provide deduction statements

  • Missing monthly CIS return deadlines

To avoid these issues, contractors should set up a clear process for verifying subcontractors, applying deductions and keeping accurate records. Many businesses use CIS-compliant payroll software or outsource the process to a bookkeeper or accountant.

Conclusion

CIS tax deductions are an important part of the UK construction industry’s tax system. Contractors must deduct tax from payments to subcontractors and send it to HMRC, unless the subcontractor is registered for gross payment status. Subcontractors can then offset these deductions against their final tax bill.

Understanding how CIS tax works helps both contractors and subcontractors stay compliant and avoid unexpected penalties. With the correct setup, accurate records and timely submissions, CIS can be managed smoothly as part of your overall financial and tax planning in construction.

Whether you are hiring tradespeople or being paid as a subcontractor, getting CIS right is essential for staying on good terms with HMRC and managing cashflow confidently.