Under the Construction Industry Scheme, a contractor deducts 20% from a registered subcontractor's payment and 30% from one that is not registered, passing the money to HMRC as an advance against the subcontractor's tax and National Insurance (gov.uk). A business that does no construction work of its own is still pulled into the scheme once it spends more than £3 million on construction in a rolling 12-month period (gov.uk).
CIS is not payroll in the PAYE sense, because a subcontractor is not an employee. It is a parallel deduction regime that many construction businesses operate at the same time as a normal payroll, and the two interact in ways that catch out employers running them side by side (gov.uk). A limited company that is both a contractor and a subcontractor can even end up offsetting the CIS taken from its own invoices against the PAYE and CIS it owes on others.
This article explains what the scheme covers, who is a contractor and who is a subcontractor, how the deduction is worked out, how subcontractors are verified, how CIS runs alongside PAYE in the same business, how deductions are paid over and reclaimed, and the penalties that follow a late CIS300 monthly return.
Key takeaways
- CIS deductions run at 0% for subcontractors with gross payment status, 20% for registered subcontractors and 30% for those that are not registered (gov.uk).
- The deduction applies only to the labour element, after the cost of materials, VAT, fuel, and plant hire has been taken out (gov.uk).
- A non-construction business becomes a deemed contractor once it spends more than £3 million on construction over 12 months (gov.uk).
- Contractors must verify each subcontractor with HMRC and issue a payment and deduction statement within 14 days of the end of the tax month (gov.uk).
- A late CIS300 monthly return attracts an immediate £100 penalty, rising to £200 after two months and tax-geared penalties after six and twelve (gov.uk).
What the Construction Industry Scheme is
The Construction Industry Scheme sets out the rules for how contractors handle payments to subcontractors for construction work (gov.uk). Rather than paying a subcontractor's invoice in full, the contractor withholds a percentage and pays it to HMRC, where it sits as an advance payment towards the subcontractor's eventual tax and National Insurance bill (gov.uk).
The scheme exists because much construction work is carried out by self-employed subcontractors rather than employees, and HMRC uses CIS to collect tax at source from a workforce that would otherwise settle up only once a year (gov.uk). The deduction is not a final tax; it is money on account, which the subcontractor later reconciles against what is actually owed (gov.uk).
CIS applies to construction work carried out in the UK, and the same rules reach businesses based outside the UK that act as a contractor or subcontractor on UK work (gov.uk). It is distinct from PAYE: genuine employees are paid through HMRC-recognised payroll software for SMEs under PAYE, while CIS governs payments to self-employed subcontractors (gov.uk).
Who counts as a contractor and who as a subcontractor
The scheme turns on two roles, and a single business can hold both at once (gov.uk).
Contractors and deemed contractors
A contractor is a business that pays subcontractors for construction work, and every contractor must register for the scheme before taking anyone on (gov.uk). This includes building firms, developers and labour agencies in the construction sector (gov.uk).
A second category catches businesses outside construction entirely. A business whose trade is not construction becomes a deemed contractor once it has spent more than £3 million on construction in the 12 months since its first payment, at which point it must operate CIS on those payments (gov.uk). This commonly affects property investors, large retailers and other organisations with significant building programmes (gov.uk).
Subcontractors and dual status
A subcontractor is a business that carries out construction work for a contractor (gov.uk). Registration is not compulsory for a subcontractor, but an unregistered subcontractor has deductions taken at the higher 30% rate, so registration is almost always worthwhile (gov.uk).
Many construction businesses are both contractor and subcontractor: they take work from a larger firm and in turn engage their own subcontractors (gov.uk). A business in that position must register in both capacities, and it then suffers CIS deductions on its own invoices while also making deductions from those it pays (gov.uk). For a smaller firm, keeping both sides of that position straight is a core part of running payroll for SMEs in the construction sector.
Work inside and outside the scheme
Not all work on a construction site falls under CIS, and the dividing line decides whether a deduction applies at all (gov.uk). The work covered by the scheme is set out below (gov.uk).
| Covered by CIS | Example |
|---|---|
| Site preparation | Laying foundations, access works |
| Demolition and dismantling | Clearing a site |
| Building work | General construction |
| Alterations and repairs | Decorating and refurbishment |
| Systems installation | Heating, lighting, power, water, ventilation |
| Post-construction cleaning | Internal cleaning after building work |
Several activities that happen in or around construction are specifically outside the scheme, and a business that only does these does not need to register (gov.uk).
| Outside CIS | Example |
|---|---|
| Professional services | Architecture and surveying |
| Equipment only | Scaffolding hire with no labour |
| Finishing trades | Carpet fitting |
| Materials manufacture | Making plant, machinery or materials |
| Logistics | Delivering materials |
| Non-construction site work | Running a canteen or site facilities |
The distinction matters because a contractor that wrongly applies a deduction to excluded work creates a reconciliation problem for the subcontractor, while one that fails to deduct on covered work carries the liability itself (gov.uk).
How CIS deductions are calculated
The deduction is not a flat cut of the invoice. It applies a rate to the labour element only, after specific costs have been stripped out (gov.uk).
The three deduction rates
HMRC sets the rate when the contractor verifies the subcontractor, and there are three possible outcomes (gov.uk).
| Status | Rate | Applies to |
|---|---|---|
| Gross payment status | 0% | Subcontractors approved to be paid in full |
| Registered | 20% | Subcontractors registered under CIS |
| Unregistered | 30% | Subcontractors HMRC cannot verify or that have not registered |
Gross payment status lets a subcontractor receive the full amount and settle its tax later, and it is granted only to businesses that pass HMRC's turnover and compliance tests (gov.uk). The gap between 20% and 30% is the single strongest reason for a subcontractor to register (gov.uk).
What comes out before the rate applies
The rate is never applied to the whole invoice. A contractor first subtracts the amounts the subcontractor paid for VAT, consumable stores, fuel (other than for travelling), plant hire, and materials used in manufacturing or prefabrication (gov.uk). Only the remaining labour element is subject to the deduction (gov.uk).
This is where errors cluster. A contractor that applies the rate to the full invoice, including materials, over-deducts and leaves the subcontractor to reclaim the difference from HMRC (gov.uk). Accurate records of the materials and plant split are therefore part of operating the scheme correctly (gov.uk).
A worked example
A worked example makes the mechanics concrete. Suppose a registered subcontractor invoices £2,000, of which £500 is materials the subcontractor paid for (gov.uk). The contractor subtracts the £500, leaving a £1,500 labour element, applies the 20% rate to produce a £300 deduction, and pays the subcontractor £1,700, being £1,500 labour less £300 plus the £500 materials (gov.uk).
Had the same subcontractor not been registered, the rate would be 30%, producing a £450 deduction and a £1,550 payment (gov.uk). The £150 difference on a single £2,000 invoice shows why verification and registration status are worth getting right before the first payment (gov.uk).
Verifying subcontractors and the deduction statement
Before paying a subcontractor, a contractor has two standing obligations: verify the subcontractor with HMRC, and document every deduction made (gov.uk).
Verification
Verification is the process by which HMRC confirms whether a subcontractor is registered and at what rate to deduct (gov.uk). The contractor submits the subcontractor's details and HMRC returns the rate to apply, 0%, 20% or 30% (gov.uk). A contractor that pays without verifying risks applying the wrong rate and becoming liable for any shortfall (gov.uk).
The payment and deduction statement
For every payment from which a deduction is taken, the contractor must give the subcontractor a payment and deduction statement within 14 days of the end of the tax month (gov.uk). The CIS tax month runs from the 6th of one month to the 5th of the next, so a deduction made in the month to 5 June generates a statement due by 19 June (gov.uk). These statements are the subcontractor's evidence of tax already paid, and without them a subcontractor cannot cleanly reclaim the deductions (gov.uk).
How CIS sits alongside PAYE in the same business
Many construction SMEs run CIS and PAYE in parallel, because a typical firm employs some staff directly and engages others as subcontractors (gov.uk). The two regimes are reported through the same HMRC employer scheme, which is why a construction employer's monthly obligations stack up quickly (gov.uk).
The distinction between an employee and a subcontractor is not a matter of preference. A worker who is genuinely employed must go through PAYE, and treating such a worker as a CIS subcontractor to save on employer National Insurance is a compliance risk that HMRC actively polices (gov.uk). The rise in the employer National Insurance rate to 15% on 6 April 2026 sharpens the incentive to get that line right, a point covered in the guide to employer National Insurance.
Because the submissions overlap, a construction business benefits from a single system that handles both. A UK payroll engine that holds the HMRC Recognised badge submits the Real Time Information for employees and tracks CIS deductions through the same monthly cycle, so the Full Payment Submission, the Employer Payment Summary and the CIS300 return are not maintained in three separate places (gov.uk). Accountants managing several construction clients typically run this through payroll bureau software so each client's CIS and PAYE positions reconcile together.
Paying and reclaiming CIS deductions
The money a contractor withholds has to be paid over, and the money a subcontractor suffers has to be reclaimed. The route differs by business type (gov.uk).
Contractors paying over deductions
A contractor pays the deductions it has made to HMRC each month, on the same cycle as PAYE (gov.uk). The payment is due by the 22nd of the month where it is made electronically, or the 19th by post, covering the tax month that ended on the 5th (gov.uk). The CIS300 monthly return, which reports those deductions, must reach HMRC by the 19th (gov.uk).
Limited company subcontractors offsetting through the EPS
A limited company that is a subcontractor does not wait until the year end to recover the CIS taken from it. It reports the deductions suffered on its Employer Payment Summary, entering the total CIS for the year to date, and HMRC sets that amount against the PAYE, National Insurance and CIS the company owes as an employer (gov.uk). Any deductions left after the employer liability is cleared are carried forward within the same tax year, and any still outstanding at year end are reclaimed using HMRC's repayment process for limited company subcontractors (gov.uk). The company must keep a record of the deductions set off, on form CIS132, along with the monthly statements from its contractors (gov.uk).
Sole trader subcontractors through Self Assessment
A sole trader subcontractor reconciles CIS through Self Assessment rather than payroll (gov.uk). The trader reports total income before deductions and the total CIS deductions on the tax return, HMRC calculates the tax due and sets the deductions against it, and any balance is payable by 31 January after the end of the tax year, with any excess refunded (gov.uk). A trader who stops trading mid-year can reclaim deductions already paid using form CIS40 (gov.uk).
The CIS300 monthly return and its penalties
The CIS300 is the monthly return every contractor files, listing each subcontractor paid and the deductions made, and it is due by the 19th even in a month where no deduction was taken (gov.uk). Late filing triggers an escalating penalty schedule under the standard rules, set out below (gov.uk).
| Delay | Penalty |
|---|---|
| Return not filed by the 19th | £100 fixed penalty |
| 2 months after the penalty date | £200 fixed penalty |
| 6 months after the penalty date | 5% of the CIS deductions, or £300, whichever is greater |
| 12 months after the penalty date | A further 5%, or £300, whichever is greater |
The penalties accumulate, so a return left unfiled for a year can attract the £100, the £200 and both tax-geared charges in sequence (gov.uk). Where a return is withheld deliberately, HMRC can apply higher tax-geared rates again (gov.uk). Because the CIS300 is due monthly and on the same date as the payment, a construction business that automates its filing removes the most common cause of these penalties, an approach explored in the guide to payroll for construction businesses (gov.uk).
Conclusion
The Construction Industry Scheme is best understood as a tax-collection mechanism bolted onto the way construction actually pays its workforce. The contractor withholds a slice of each subcontractor's labour payment, 20% for the registered, 30% for the unverified and nothing for those with gross payment status, and the subcontractor reconciles that advance against its real liability later. The detail that trips businesses up is rarely the rate itself but the surrounding discipline: verifying before paying, stripping materials out before applying the rate, issuing statements on time, and filing the CIS300 by the 19th.
For a construction business running employees through PAYE and subcontractors through CIS, the two regimes share a monthly rhythm and an employer scheme, and the real efficiency comes from treating them as one compliance cycle rather than two. As HMRC continues to tighten the line between employment and subcontracting, and as the cost of employer National Insurance rises, the businesses that keep clean records and automate their monthly submissions are the ones least exposed to a penalty or an enquiry.
Frequently asked questions
What is the difference between CIS and PAYE?
PAYE is the system for deducting income tax and National Insurance from employees' wages, while CIS is a separate regime for deducting tax on account from payments to self-employed subcontractors in construction (gov.uk). A genuine employee must be paid through PAYE, not CIS, and many construction businesses operate both at once because they have employees and subcontractors (gov.uk).
How much is deducted under CIS?
The deduction is 20% for a registered subcontractor, 30% for one that is not registered or cannot be verified, and 0% for a subcontractor with gross payment status (gov.uk). The rate applies only to the labour element, after the cost of materials, VAT, fuel and plant hire has been subtracted (gov.uk).
When is the CIS monthly return due?
The CIS300 monthly return must reach HMRC by the 19th of the month, covering the tax month that ended on the 5th, and it is due even when no payments were made to subcontractors (gov.uk). Missing the deadline brings an immediate £100 penalty, with further penalties after two, six and twelve months (gov.uk).
How does a limited company reclaim CIS deductions?
A limited company subcontractor reports the CIS deductions suffered on its Employer Payment Summary and HMRC offsets them against the PAYE, National Insurance and CIS the company owes as an employer (gov.uk). Any amount left after the year end is reclaimed through HMRC's repayment process for limited company subcontractors (gov.uk).
