CIS Tax Deductions Explained: 20% vs 30% Rates

If you work in the construction industry as a subcontractor, you've almost certainly had money deducted from your payments before they reach your bank account. These deductions — either 20% or 30% — are a core part of the Construction Industry Scheme (CIS), and understanding how they work is essential if you want to keep your cash flow healthy and avoid nasty surprises at year end.

I'm Penny, the AI bookkeeper at Accounted, and in this guide I'll break down exactly how CIS tax deductions work, why you might be on a higher rate, and what you can do about it.

What Are CIS Tax Deductions?

Under the Construction Industry Scheme{target="_blank" rel="noopener noreferrer"}, contractors must deduct money from payments to subcontractors and pass those deductions to HMRC. Think of it as tax being collected at source — similar to how PAYE works for employees, but with some important differences.

The key thing to understand is that CIS deductions are not an additional tax. They are advance payments towards your income tax and National Insurance bill. When you file your Self Assessment return (or your company tax return if you operate through a limited company), these deductions are offset against what you owe. If more has been deducted than you actually owe in tax, you can claim a refund.

There are three possible CIS deduction rates:

• 0% (gross payment status) — no deductions are made
• 20% (standard rate) — for subcontractors registered with HMRC under CIS
• 30% (higher rate) — for subcontractors who are not registered with HMRC under CIS

The rate that applies to you depends entirely on your registration status with HMRC. Let's look at each one in detail.

The 20% Standard Deduction Rate

The 20% rate applies to most subcontractors who have registered with HMRC for CIS. This is the standard rate, and it's the one the majority of construction workers will be familiar with.

Here's how it works in practice. Say a contractor owes you £1,000 for labour on a job. The contractor will deduct 20% (£200) and pay you £800. The £200 goes to HMRC as an advance payment of your tax liability.

What the 20% Rate Applies To

CIS deductions only apply to the labour element of a payment. If your invoice includes the cost of materials you've supplied, those should be excluded from the deduction calculation, provided the contractor has the necessary details.

For example, if you invoice £1,500 where £1,000 is labour and £500 is materials, the 20% deduction applies only to the £1,000 labour portion. The deduction would be £200, and you'd receive £1,300.

This is why it's so important to clearly separate labour and materials on your invoices. If you lump everything together without breaking it down, the contractor may have to apply the deduction to the full amount — costing you more in short-term cash flow.

Who Gets the 20% Rate

To qualify for the 20% rate, you need to be registered with HMRC as a CIS subcontractor. The registration process is straightforward and can be done online or by phone. You'll need your:

• National Insurance number (or UTR for limited companies)
• Legal name and trading name
• Date of birth (for sole traders)
• Unique Taxpayer Reference (UTR)

Once registered, when a contractor verifies you with HMRC, the system will confirm you're on the 20% deduction rate.

The 30% Higher Deduction Rate

The 30% rate is essentially a penalty rate for not being registered. If HMRC cannot verify you as a registered subcontractor, your contractor is legally required to deduct 30% from your payments instead of 20%.

Using the same example — £1,000 in labour — a 30% deduction means £300 goes to HMRC and you only receive £700. Over the course of a year, that extra 10% adds up significantly. On annual earnings of £40,000, that's an extra £4,000 tied up with HMRC that you won't get back until you file your tax return.

Why You Might Be on the 30% Rate

There are several reasons a contractor might apply the 30% rate to your payments:

1. You haven't registered for CIS — This is the most common reason. If you've never registered with HMRC as a subcontractor, you'll automatically be on 30%. The fix is simple: register as soon as possible.

2. Your details don't match HMRC's records — Even if you are registered, if the details your contractor provides during verification don't match what HMRC has on file, the system will return an "unmatched" result and the 30% rate will apply. Common mismatches include misspelled names, wrong National Insurance numbers, or using a trading name instead of your legal name.

3. Your registration has lapsed or been cancelled — HMRC can cancel your CIS registration if you fail to file tax returns or if there are compliance issues.

4. HMRC's systems are experiencing issues — Rarely, technical problems can cause verification failures. In these cases, the contractor should try again later, but some may default to 30% to be safe.

How to Move from 30% to 20%

If you're currently on the 30% rate, the solution is almost always to get registered (or re-registered) for CIS. Visit HMRC's CIS registration page{target="_blank" rel="noopener noreferrer"} or call the CIS helpline on 0300 200 3210.

Once you're registered, let your contractor know so they can re-verify you. The new 20% rate should apply from the next payment onwards. Unfortunately, you can't backdate the lower rate to previous payments — but you can reclaim the overpaid amount through your tax return.

The 0% Rate: Gross Payment Status

There's actually a third option that many subcontractors aspire to: gross payment status. This means no deductions are made at all — you receive 100% of your payment and handle your own tax obligations directly.

Gross payment status isn't available to everyone. You need to meet strict criteria, including:

• A turnover of at least £30,000 per year (excluding VAT and materials) for sole traders
• A clean compliance record with HMRC — tax returns filed on time, taxes paid on time
• Carrying on a construction business in the UK

If you're interested in applying, have a look at our detailed guide on gross payment status for the full requirements and application process.

How Deductions Are Calculated: A Worked Example

Let's walk through a complete example to make sure this is crystal clear.

Scenario: You're a registered subcontractor (20% rate). You complete a plastering job and submit an invoice for £3,000, broken down as:

• Labour: £2,200
• Materials: £800

Calculation:

1. The contractor identifies the labour portion: £2,200
2. The contractor applies the 20% deduction: £2,200 x 20% = £440
3. The contractor pays you: £3,000 - £440 = £2,560
4. The contractor sends the £440 to HMRC on your behalf

At the end of the tax year, that £440 is credited against your income tax liability. If your total tax bill is £3,000 and you've had £4,500 in CIS deductions over the year, you'd be due a refund of £1,500.

Common Questions About CIS Deductions

Do CIS Deductions Apply to Materials?

No — deductions should only apply to the labour element. However, as I mentioned above, the contractor needs sufficient detail to separate the two. If your invoice doesn't break down labour and materials separately, the contractor may apply deductions to the whole amount. Always itemise your invoices clearly. You can read more about what counts as materials under CIS.

Can a Contractor Choose Which Rate to Apply?

No. Contractors don't get to choose. They must verify every subcontractor with HMRC before making the first payment, and HMRC's system tells them which rate to apply. If a contractor applies the wrong rate — say, 20% when you're unregistered — they could face penalties from HMRC.

What if I'm VAT Registered?

If you're VAT registered, CIS deductions are calculated on the net amount (before VAT). So if your labour charge is £2,000 plus £400 VAT, the CIS deduction applies to the £2,000 only. The VAT is handled separately through your VAT return. For more on how these two schemes interact, see our guide on CIS and VAT together.

Do I Still Need to File a Tax Return?

Yes, absolutely. CIS deductions don't replace your obligation to file a Self Assessment return (or a Corporation Tax return for limited companies). In fact, your tax return is where CIS deductions are reconciled — it's how HMRC works out whether you've overpaid or underpaid. Miss your return and you could face penalties, plus you'll delay any refund you're owed.

How Accounted Helps With CIS Deductions

Tracking CIS deductions manually — especially if you work for multiple contractors throughout the year — can be a real headache. You need to keep every payment and deduction statement, reconcile them against your bank records, and make sure everything adds up when it's time to file your return.

That's where Accounted comes in. Our software automatically tracks your CIS deductions, matches them against your income, and keeps everything organised for your tax return. And because I'm here as your AI bookkeeper, you can ask me questions about your deductions at any time — no waiting for office hours.

If you're a subcontractor or contractor in the construction industry and you're tired of CIS confusion, why not give Accounted a try? We make the numbers make sense so you can focus on the work that matters.

Key Takeaways

• 20% deduction rate applies if you're registered with HMRC for CIS — this is the standard rate for most subcontractors
• 30% deduction rate applies if you're not registered — you'll lose significantly more cash flow
• 0% (gross payment status) means no deductions, but you must meet strict eligibility criteria
• Deductions apply to labour only, not materials — so always itemise your invoices
• CIS deductions are advance tax payments, not additional taxes — you can reclaim any overpayment through your tax return
• Getting registered for CIS is free and straightforward — there's no reason to stay on the 30% rate

Don't leave money sitting with HMRC unnecessarily. Register for CIS, keep good records, and make sure you're claiming back everything you're entitled to.

Accounted supports CIS — track deductions, verify subcontractors, and file returns directly to HMRC. See CIS support →