How the Construction Industry Scheme Works

If you work as a subcontractor in the construction industry, you've probably noticed that contractors don't pay you the full amount on your invoices. Instead, they deduct tax at source and pay it directly to HMRC on your behalf.

This system is called the Construction Industry Scheme — or CIS. Understanding how it works is essential for managing your income and ensuring you don't pay more tax than you owe.

What Is CIS?

The Construction Industry Scheme is a tax deduction system that applies to payments from contractors to subcontractors in the construction sector.

How it works:

You invoice a contractor for work completed
The contractor deducts tax from your payment
The contractor pays the deduction to HMRC
You receive the net amount

Example: You invoice £1,000 for a job. The contractor deducts £200 (20%) and pays it to HMRC. You receive £800.

The deduction is not additional tax — it's an advance payment towards your Income Tax and National Insurance. When you file your Self Assessment, the deductions are credited against your tax bill.

Who Does CIS Apply To?

CIS applies to most construction work in the UK, with some exceptions.

Covered work includes:

Building and construction
Alterations, repairs, extensions
Demolition and dismantling
Installation of heating, lighting, power, water systems
Internal cleaning of buildings after construction
Painting and decorating
Site preparation and civil engineering

Not covered:

Architecture and surveying (professional services)
Carpet fitting
Manufacturing materials off-site
Delivering materials only
Work on your own property

Who's a contractor?

A contractor is any business that pays subcontractors for construction work and spends more than £3 million per year on construction, OR whose main business is construction.

Who's a subcontractor?

A subcontractor is anyone who does construction work for a contractor but isn't directly employed by them.

The Three CIS Deduction Rates

Not everyone has the same amount deducted. There are three rates:

Status	Deduction rate	Who qualifies
Registered	20%	Most registered subcontractors
Unregistered	30%	Subcontractors not registered with HMRC
Gross payment	0%	Approved subcontractors with clean compliance history

20% Rate (Registered)

If you're registered for CIS, contractors deduct 20% from your payments. This is the standard rate for most subcontractors.

Example: £1,000 invoice → £200 deducted → £800 received

30% Rate (Unregistered)

If you're not registered, contractors must deduct 30%. This is deliberately higher to encourage registration.

Example: £1,000 invoice → £300 deducted → £700 received

Registering is free and straightforward — there's no good reason to stay unregistered.

0% Rate (Gross Payment Status)

Some subcontractors qualify for gross payment status, meaning no deductions are made. This helps cash flow but requires meeting strict criteria.

To qualify for gross payment status:

Your business must be based in the UK
You must have paid all tax and National Insurance on time for the past 12 months
Your annual construction turnover must exceed certain thresholds (£30,000 for sole traders)

Gross payment status is reviewed annually. If you fail to meet the requirements, you'll be moved back to 20%.

How to Register for CIS

Registering for CIS as a subcontractor takes about 15 minutes and can be done online.

What you'll need:

Your National Insurance number
Your Unique Taxpayer Reference (UTR) — if you're already registered for Self Assessment
Your business details (name, address, structure)

Steps to register:

Go to Register for CIS on GOV.UK
Sign in with your Government Gateway account (or create one)
Complete the registration form
HMRC will confirm your registration

If you don't have a UTR:

You'll need to register for Self Assessment first. This can take up to 10 working days to receive your UTR, so plan ahead.

How Verification Works

Before paying you, contractors must verify your CIS status with HMRC. This tells them which deduction rate to apply.

The verification process:

You give the contractor your name, UTR, and National Insurance number
The contractor contacts HMRC (usually online)
HMRC confirms your status and deduction rate
The contractor applies the correct rate to your payments

Important: If you can't provide your UTR or NI number, or if HMRC can't verify you, the contractor must apply the 30% rate.

Verification reference number:

Each verification generates a reference number. The contractor includes this on your payment statement. Keep these statements — they're your proof of tax paid.

Understanding Your CIS Payment Statement

Every time a contractor pays you, they must provide a payment statement showing:

Field	What it means
Gross amount	Your invoice total before deductions
Cost of materials	Materials you paid for (not subject to CIS)
Amount liable to deduction	Gross minus materials
CIS deduction	Tax withheld (20% or 30%)
Net payment	What you actually receive
Verification number	HMRC reference for the verification

Example statement:

Gross amount:                £1,500.00
Less: Materials              £  300.00
Amount liable to deduction:  £1,200.00
CIS deduction (20%):         £  240.00
Net payment:                 £  960.00

Keep every payment statement. You'll need them when filing your Self Assessment to reclaim any overpaid tax.

Materials: What's Not Deducted

CIS deductions only apply to labour — not materials you've purchased for the job.

The rule: If you buy materials that become part of the construction work, their cost is deducted from the gross amount before calculating CIS.

Example: You invoice £2,000. Materials cost £500. CIS is calculated on £1,500:

£1,500 × 20% = £300 CIS deduction
You receive: £2,000 - £300 = £1,700

What counts as materials:

Building supplies (bricks, timber, cement)
Fixtures and fittings you install
Equipment that becomes part of the building

What doesn't count:

Tools and equipment you keep
Protective clothing
Fuel for vehicles
Scaffolding hire

You'll need invoices and receipts to support material claims.

Reclaiming Overpaid CIS

Here's the good news: CIS deductions are not your final tax. They're advance payments.

When you file your Self Assessment return, HMRC calculates your actual tax liability and credits all CIS deductions against it.

Example:

Item	Amount
Total income	£45,000
Allowable expenses	£5,000
Taxable profit	£40,000
Income Tax due	£5,486
Class 4 NI due	£2,379
Total tax liability	£7,865
CIS already deducted	£9,000
Refund due	£1,135

In this example, the subcontractor paid £9,000 in CIS deductions but only owed £7,865. HMRC refunds the £1,135 difference.

How to claim your refund:

File your Self Assessment return
Include all CIS deductions in the "CIS deductions made" section
If you've overpaid, HMRC will calculate and issue a refund
Refunds are typically paid within 4-6 weeks of filing

Important: You can only reclaim CIS through Self Assessment. There's no other way to get overpaid tax back.

Common CIS Mistakes to Avoid

Not registering

The 30% unregistered rate takes 10% more from every payment. If you earn £50,000 in a year, that's an extra £5,000 deducted unnecessarily.

Losing payment statements

Without statements, you can't prove how much CIS was deducted. Keep digital copies and organize them by month.

Missing material deductions

If you supply materials, make sure they're deducted before CIS is calculated. Some contractors make errors — check every statement.

Not filing Self Assessment

If you don't file, you can't reclaim overpaid CIS. Many subcontractors leave thousands of pounds unclaimed each year.

Confusing CIS with employment

CIS doesn't make you employed. You're still self-employed and responsible for:

Keeping records
Filing Self Assessment
Paying Class 2 National Insurance (if not covered by employment)

CIS Rates and Thresholds Summary

Item	2024/25 rate
Registered subcontractor	20%
Unregistered subcontractor	30%
Gross payment status	0%
Turnover threshold for gross (sole trader)	£30,000
Turnover threshold for gross (partnership)	£30,000 per partner
Turnover threshold for gross (company)	£30,000

CIS and Other Taxes

CIS only covers Income Tax and Class 4 National Insurance. You may still need to pay:

Class 2 National Insurance:

Self-employed people pay Class 2 NI (£3.45 per week for 2024/25) separately. This isn't covered by CIS deductions.

VAT:

If you're VAT-registered, CIS is calculated on the VAT-exclusive amount. VAT is added separately and not subject to CIS.

Example with VAT:

Labour:                      £1,000.00
VAT (20%):                   £  200.00
Total invoice:               £1,200.00

CIS is calculated on £1,000, not £1,200.
CIS deduction (20%):         £  200.00
Net payment:                 £1,000.00 (you collect VAT separately)

Key Dates for CIS Subcontractors

Date	What happens
5 April	Tax year ends
31 January	Self Assessment deadline for previous tax year
31 January	Payment deadline for any tax owed
Monthly	Contractors submit CIS returns to HMRC

Next Steps

If you're new to CIS, here's what to do:

Register for CIS — Reduce your deduction rate from 30% to 20%
Register for Self Assessment — You need this to reclaim overpaid tax
Keep all payment statements — Store them securely by tax year
Track your income and expenses — Use accounting software or a spreadsheet
File your tax return — Claim back any overpaid CIS

CIS can feel confusing at first, but once you understand the flow — invoice, deduction, reclaim — it becomes routine. The key is staying organized and filing your Self Assessment on time.

This guide is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules change frequently. Always verify current requirements on GOV.UK or consult a qualified accountant for your specific situation.

Official Sources

Construction Industry Scheme (CIS) - GOV.UK
CIS for subcontractors - GOV.UK
Register as a CIS subcontractor - GOV.UK
Gross payment status - GOV.UK
CIS deductions - GOV.UK

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