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CIS Deductions Explained: What Gets Taken From Your Payments

If you work in the construction industry as a subcontractor, money gets deducted from your payments before you ever see it. Those deductions are made under the Construction Industry Scheme (CIS), and if you don’t understand how they work, you could end up overpaying tax or running into cash flow problems. This article explains exactly what gets taken, why, and what you can do about it — whether you’re a sole trader, a partnership, or a limited company working in construction.

What is the Construction Industry Scheme?

The Construction Industry Scheme is a HMRC tax administration system that applies to contractors and subcontractors working in the UK construction industry. Under the scheme, contractors are required to deduct money from payments they make to subcontractors and send those deductions directly to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance liability.

CIS exists because construction has historically seen high levels of tax non-compliance. The scheme puts the obligation on contractors to collect tax at source, rather than relying on every subcontractor to pay their own bill at the end of the year.

HMRC administers CIS separately from PAYE, but the principle is similar — tax gets collected before money reaches the worker, not after.

Who does CIS apply to?

CIS applies to contractors and subcontractors working in construction operations in the UK. HMRC’s definition of construction is broad. It covers not just building work, but also:

  • Demolition and dismantling
  • Alterations, repairs, and maintenance
  • Decorating and painting
  • Installing systems such as heating, lighting, and ventilation
  • Civil engineering work
  • Site preparation and landscaping connected to construction

If you are a contractor — meaning you pay other people or businesses to do construction work — you must register for CIS and make deductions from subcontractor payments. If you are a subcontractor — meaning you are paid by a contractor to carry out construction work — you need to be registered so the contractor knows what rate to deduct.

Some businesses act as both contractor and subcontractor at the same time. A main contractor, for example, might take on a large project and then bring in specialist trades. In that case, they deduct from those they pay, while the client deducts from them.

Businesses outside construction can also fall within CIS if they spend more than £3 million on construction work in any 12-month period. Check the latest HMRC guidance if you are unsure whether your business triggers this threshold.

What gets deducted from your payments?

The deduction is applied to the labour element of the payment only. It does not apply to the cost of materials.

When a contractor pays a subcontractor, they must work out:

  1. The total payment due
  2. The cost of any materials (these are excluded from the deduction)
  3. The remaining amount — the labour element — on which the deduction is applied

So if you invoice £5,000 for a job and £1,500 of that is materials, the deduction only applies to the remaining £3,500.

It is worth keeping your invoices clear. If you do not break out the materials cost, the contractor may apply the CIS deduction to the entire invoice amount. That means more money gets held back than should be.

CIS deduction rates

There are three possible deduction rates under CIS. Which one applies to you depends on your registration status.

20% — registered subcontractor

If you are registered with HMRC as a CIS subcontractor, the standard deduction rate is 20%. This applies to the labour element of your payments. The contractor verifies your status with HMRC before paying you, and HMRC confirms the correct rate to use.

30% — unregistered subcontractor

If you have not registered for CIS, the contractor must deduct 30% from the labour element of your payments. This is a significant amount to lose upfront. Registering with HMRC as a subcontractor is free and straightforward, so there is no good reason to remain unregistered.

0% — gross payment status

Some subcontractors qualify for gross payment status, which means the contractor pays them in full with no deduction. This is covered in more detail below.

How materials and VAT affect CIS deductions

Materials

Materials are excluded from CIS deductions. The contractor should not deduct CIS from the part of your invoice that covers the cost of materials you have bought and used on the job. This includes things like timber, fixings, pipe, cable, or any other material consumed in carrying out the work.

It does not include plant hire, equipment, or scaffolding — those are generally treated as part of the labour side of the contract unless the subcontractor owns the equipment and the hire forms a genuine separate element of the contract. If you are unsure how to split your invoices, it is worth speaking to an accountant who knows construction work.

VAT

CIS deductions are calculated on the net amount — before VAT. VAT sits outside the CIS calculation entirely. The contractor pays VAT to you on top of the payment (where applicable), and you account for that separately through your VAT returns.

Note that domestic reverse charge VAT also applies to many CIS transactions from March 2021 onwards. Under reverse charge, the contractor accounts for the VAT rather than the subcontractor. This affects your VAT return but does not change how CIS deductions are calculated.

Gross payment status: getting paid in full

Gross payment status means a contractor can pay you in full without making any CIS deduction. You still owe tax and National Insurance — you just pay it through your tax return rather than having it taken upfront.

To qualify for gross payment status, you must pass three tests:

  1. Business test — you must carry on construction work in the UK through a business account
  2. Turnover test — your net turnover from construction must meet a minimum threshold (check the latest HMRC guidance for the current figures, as they depend on your business structure)
  3. Compliance test — you must have a clean tax compliance record, meaning no late returns, late payments, or outstanding tax debts with HMRC

Gross payment status is worth applying for if your turnover is high enough. Having 20% or 30% deducted from your payments can put real pressure on your cash flow, especially if you regularly spend money on materials upfront.

HMRC can also cancel gross payment status if your compliance slips. A single late return or missed payment can trigger a review, so if you hold gross payment status, staying on top of your obligations is essential.

How to reclaim CIS deductions

CIS deductions are not a final tax payment — they are advance payments against your tax bill. At the end of the tax year, you work out what you actually owe, and the deductions made by contractors are offset against that amount.

Sole traders and partnerships

If you operate as a sole trader or in a partnership, you reclaim CIS deductions through your self assessment tax return. You report your income and expenses, calculate your tax liability, and deduct the CIS amounts that were withheld during the year. If the deductions exceed what you owe, HMRC will refund the difference.

You should receive a CIS statement from each contractor you worked for. Keep these safe — they show the gross payment, the deduction made, and the net amount paid to you. You will need these figures for your tax return.

Limited companies

If you operate through a limited company, the process is different. CIS deductions are offset against the company’s PAYE liability — specifically, against what the company owes to HMRC as an employer. You declare the deductions on the company’s monthly or quarterly Employer Payment Summary (EPS) and reduce the PAYE payment accordingly.

If the CIS deductions exceed the PAYE liability in a given period, you can carry the excess forward or apply to HMRC for a refund. The refund process for limited companies can take time, so good record-keeping is essential.

CIS deductions if you operate through a limited company

Operating through a limited company under CIS adds a layer of complexity. The company is a separate legal entity, so the CIS deductions belong to the company, not to you personally.

The company must:

  • Register for CIS as a subcontractor (and as a contractor if it pays other subcontractors)
  • Ensure contractors verify its status with HMRC before the first payment
  • Offset CIS deductions received against its PAYE/NIC obligations each month
  • File CIS returns if it acts as a contractor paying subcontractors

If your company both pays subcontractors and gets paid under CIS, you have obligations in both directions. As a contractor, you must file a monthly CIS return showing what you paid and what you deducted. As a subcontractor, you must track the deductions made from your income and recover them through the PAYE system.

Getting this wrong is common and can result in the company underpaying PAYE or failing to reclaim deductions it is owed. If your company is growing or taking on more complex contracts, management accounts can help you stay on top of what is owed in each direction.

Keeping records under CIS

Good records are not optional under CIS — they are a legal requirement. HMRC can inspect your records, and if you cannot show the correct split between labour and materials on your invoices, you risk disputes and penalties.

As a subcontractor, you should keep:

  • All invoices you raise, showing labour and materials separately
  • CIS deduction statements from every contractor
  • Records of any gross payment status applications or confirmations
  • Bank statements showing payments received

As a contractor, you must:

  • Verify every new subcontractor with HMRC before making the first payment
  • Deduct at the correct rate
  • Give each subcontractor a written statement of the payment and deduction
  • File a monthly CIS return with HMRC
  • Keep records for at least three years

Using accounting software makes this significantly easier. If you are not already set up with a system that handles CIS, Xero training can help you manage CIS deductions, invoicing, and payroll in one place.

Thorough bookkeeping throughout the year also means your accountant can prepare accurate returns and identify any deductions that have been over-withheld.

Wrapping up

CIS deductions are not a tax in themselves — they are a system for collecting tax early. Whether you are a sole trader getting 20% withheld from every invoice or a limited company juggling contractor and subcontractor obligations simultaneously, understanding how the scheme works lets you plan properly, avoid cash flow surprises, and recover what you are owed. The rules are not especially complicated once you know them, but the paperwork has to be right. If it is not, you either miss out on refunds or face penalties you could have avoided.

Frequently asked questions

What is the CIS deduction rate for 2026/27?

In 2026/27, the standard CIS deduction rate is 20% for registered subcontractors and 30% for unregistered subcontractors. The deduction applies to the labour element of the payment only, not to the cost of materials. Subcontractors with gross payment status have 0% deducted.

Can CIS deductions be reclaimed?

Yes. CIS deductions are advance payments towards your tax liability, not a final tax charge. Sole traders and partners reclaim them through their self assessment tax return. Limited companies offset them against PAYE obligations and can apply for a refund if the deductions exceed what the company owes.

Do CIS deductions apply to materials?

No. CIS deductions only apply to the labour element of a payment. The cost of materials you have supplied for the job is excluded. You should itemise materials clearly on your invoices, otherwise the contractor may apply the deduction to the full invoice amount by mistake.

How do I apply for gross payment status?

You apply to HMRC for gross payment status, either when you first register for CIS or afterwards. You must pass a business test, a turnover test, and a compliance test. If approved, contractors pay you in full with no deduction. HMRC reviews your status annually, and non-compliance can result in gross payment status being removed.

What happens if a contractor does not deduct CIS?

If a contractor pays you without making the required CIS deduction, the contractor — not you — is liable for the amount that should have been deducted. However, HMRC may still pursue the tax from you if it cannot recover it from the contractor. It is always better to ensure the correct procedure is followed from the start.

Do I need to file a CIS return if I am a subcontractor?

Subcontractors do not file CIS returns — contractors do. As a subcontractor, your obligation is to be registered, provide your UTR number for verification, and account for the deductions through your tax return or PAYE. If your business also pays other subcontractors, it must register as a contractor and file monthly CIS returns.