CIS for Subcontractors: Understanding Your Deductions

The Accounted Business Team·26 February 2026·6 min read

What Is the Construction Industry Scheme?

The Construction Industry Scheme — universally known as CIS — is HMRC's system for collecting tax at source from subcontractors working in the construction industry. If you're a subcontractor, your contractor deducts tax from your payments before paying you. These deductions are then passed to HMRC as advance payments towards your tax bill.

Think of it like PAYE, but for self-employed construction workers. The key difference is that CIS deductions aren't your final tax liability — they're payments on account. If your actual tax bill is lower than the total deductions made, you'll get the difference back.

CIS applies to most construction work: building, decorating, plumbing, electrical work, demolition, roadbuilding, and civil engineering. It also covers some activities you might not expect, like installing heating, ventilation, and air conditioning systems.

CIS Deduction Rates

The rate deducted from your payments depends on your registration status:

20% — Registered Subcontractors

If you're registered with HMRC as a CIS subcontractor, the standard deduction is 20% of the labour element of each payment. This is the most common rate. Registration is free and straightforward — you provide HMRC with your UTR, National Insurance number, and business details.

30% — Unregistered Subcontractors

If you haven't registered for CIS, contractors must deduct 30% from your payments. There's no good reason to remain unregistered — the extra 10% deduction is effectively an interest-free loan to HMRC that you'll have to wait months to recover. Register as soon as possible.

0% — Gross Payment Status

Some subcontractors qualify for gross payment status, meaning no deductions are made. You receive your full payment and settle your tax through Self Assessment or Corporation Tax returns. To qualify, you generally need to demonstrate:

A turnover of at least £30,000 per year (for sole traders)
A good compliance record with HMRC — all returns filed on time, all tax paid on time
The business must be run through a UK bank account

Gross payment status is reviewed annually. If your compliance record slips — even one late filing — HMRC can revoke it, and you'll drop back to 20% deductions.

How CIS Deductions Are Calculated

CIS deductions apply to the labour element of your payment only. Materials are excluded. This is one of the most important aspects of CIS, and getting it wrong costs subcontractors money.

The Materials Exclusion

If you supply materials as part of your work, the cost of those materials is deducted from the gross payment before the CIS percentage is applied.

Example:

You complete a job for £5,000:

Labour: £3,500
Materials: £1,500

CIS deduction (at 20%): 20% of £3,500 = £700

You receive: £5,000 – £700 = £4,300

If the materials weren't separated, the deduction would be 20% of £5,000 = £1,000 — costing you an unnecessary £300 in cash flow.

What Counts as Materials?

Materials include anything you purchase and incorporate into the construction work:

Building materials (bricks, timber, plasterboard, cement)
Fixtures and fittings you supply
Plant hire costs (scaffolding, equipment rental)
Consumables used on the job

Materials do not include:

Your tools and equipment (these are your business assets)
Travel costs to site
General overheads

Always itemise materials separately on your invoices. If you don't separate labour and materials, the contractor has no basis to exclude materials — and the full amount gets the 20% or 30% deduction.

What Contractors Must Do

If you're a contractor in the construction industry, you have obligations under CIS too:

Verify Subcontractors

Before making the first payment to a subcontractor, you must verify them with HMRC. This tells you what deduction rate to apply. You can verify online through HMRC's CIS service.

Make Monthly Returns

Contractors must submit a monthly CIS return to HMRC by the 19th of each month, detailing all payments made to subcontractors and deductions applied. Late returns attract a £100 penalty for each month they're late (up to a maximum of £3,000 for 12 months).

Provide Payment and Deduction Statements

After each payment, you must give the subcontractor a written statement showing the gross amount, the deduction made, and the net payment. Subcontractors need these statements to reclaim their deductions — so don't lose them.

Accounted's CIS features handle verification, deduction calculations, and monthly returns automatically, reducing the administrative burden for contractors.

How to Reclaim CIS Deductions

This is the part that matters most to subcontractors: getting your money back.

Sole Traders: Through Self Assessment

If you're a sole trader, your CIS deductions are offset against your Self Assessment tax bill. When you file your tax return, you declare your total income and expenses, calculate your tax liability, and then deduct the total CIS deductions made during the year.

If the deductions exceed your tax liability, HMRC owes you a refund. This is common for subcontractors with significant expenses or whose income fluctuates throughout the year.

Example:

Total self-employment income: £45,000
Total expenses: £12,000
Taxable profit: £33,000
Income Tax due: £4,086
Class 4 NICs due: £1,226
Total tax and NICs: £5,312
CIS deductions suffered: £7,200
HMRC owes you: £1,888

The refund is typically processed within 4-6 weeks of filing your return.

Limited Companies: Through Corporation Tax

If you operate through a limited company, CIS deductions are offset against your Corporation Tax, PAYE, and National Insurance liabilities. You reclaim them through your company's monthly or quarterly payroll submissions, or on your Corporation Tax return.

Keeping Records

To reclaim deductions, you need evidence. Keep every payment and deduction statement your contractor gives you. If you lose them, ask the contractor for duplicates. HMRC also holds records of all deductions reported through the monthly returns, but having your own copies makes the process smoother and allows you to spot errors.

Common issues:

Contractor didn't report the deduction: Your CIS statement says £700 was deducted, but HMRC's records don't show it. You'll need to provide your statement as evidence and may need the contractor to correct their return.
Materials not separated: If your contractor deducted CIS on the full amount including materials, you can't directly reclaim the excess CIS — you'll need the contractor to correct the payment.
Wrong deduction rate applied: If you're registered at 20% but the contractor deducted 30%, contact the contractor to verify your details and correct future payments. The excess deduction is still offset against your tax bill.

Common Mistakes Subcontractors Make

Not Registering for CIS

The single biggest mistake. Moving from 30% to 20% deductions is free and immediate. There's no reason to leave money sitting with HMRC for months longer than necessary.

Not Separating Materials on Invoices

Every invoice should clearly show the labour and materials split. If it doesn't, you're overpaying CIS deductions on materials that should be excluded. Over a year, this can add up to thousands of pounds tied up unnecessarily.

Not Filing Self Assessment on Time

If you miss the 31 January deadline, HMRC won't process your refund until you file. Plus, you'll face late filing penalties. Your CIS deductions are sitting with HMRC earning them interest while you wait.

Losing Payment and Deduction Statements

These are your proof. Without them, reclaiming deductions becomes difficult. Photograph them, scan them, or — better yet — capture them through your accounting software as you receive them.

Get Started with Accounted

Accounted is built for the construction industry. Track CIS deductions as they happen, separate labour and materials automatically, and know exactly what you're owed when Self Assessment time comes. Start your free trial today — no credit card required.

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