CIS or PAYE: Which Applies to Your Workers?

CIS vs PAYE: The Core Difference

CIS applies to self-employed subcontractors. The contractor deducts a percentage from payments and sends it to HMRC, but does not pay employer's National Insurance or provide employment rights.

PAYE applies to employees. The employer deducts income tax and employee's National Insurance, pays employer's National Insurance on top, and provides employment rights (holiday pay, sick pay, pension auto-enrolment, protection from unfair dismissal).

Getting the classification wrong is expensive. If HMRC determines that someone you treated as a CIS subcontractor was actually an employee, you could owe backdated PAYE, employer's NI, penalties, and interest.

How to Determine Employment Status

HMRC uses several tests:

Control

• Employee: The employer controls what work is done, how, when, and where
• Self-employed: The worker decides how to complete the work and sets their own schedule

Substitution

• Employee: Must do the work personally
• Self-employed: Can send a substitute to do the work in their place

Financial Risk

• Employee: Gets paid regardless; no risk of loss
• Self-employed: Bears financial risk — may need to correct faulty work at own cost, provides own tools, quotes for jobs

Integration

• Employee: Integral part of the business, wears uniform, uses company email
• Self-employed: In business on their own account, works for multiple clients

HMRC's CEST Tool

HMRC provides the Check Employment Status for Tax (CEST) tool online. Answer a series of questions about the working arrangement and CEST gives an indication of the correct status.

While CEST is not legally binding, HMRC has stated it will stand by the result if the information provided is accurate. Use it for borderline cases and keep a record of the result.

The Consequences of Getting It Wrong

If HMRC reclassifies a CIS subcontractor as an employee:

• Backdated PAYE and employee's NI — for the entire period of misclassification
• Employer's NI — 13.8% on top of the worker's pay
• Penalties — for incorrect CIS returns and failure to operate PAYE
• Interest — on all unpaid amounts
• Employment rights claims — the worker may claim holiday pay, sick pay, and other entitlements

Practical Tips

• Use written contracts that reflect the true working arrangement
• Allow genuine substitution rights
• Do not integrate subcontractors into your business like employees
• Use CEST for every new engagement and keep the result
• Review arrangements regularly — the status can change over time

Accounted helps you track both CIS subcontractor payments and PAYE obligations clearly and separately.

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Do not blur the line between CIS and PAYE. Sign up for Accounted and keep your worker classifications clear and compliant.