CIS Explained: A UK Subcontractor's Complete Guide to Construction Industry Scheme Deductions in 2026/27

If you work as a subcontractor in the UK construction industry, the chances are that the contractor paying you deducts money from your payments before handing over the rest. This is the Construction Industry Scheme (CIS) — a tax collection system that HMRC introduced to reduce tax evasion in the construction sector. Understanding how it works, what rate applies to you, and how to reclaim deductions made in excess of your actual tax bill is essential for managing your money.

What is the CIS?

The Construction Industry Scheme requires contractors to deduct money at source from payments to subcontractors and pass those deductions directly to HMRC. The deductions are credited against the subcontractor's income tax and National Insurance liability for the year — not additional taxes, just advance payments toward what you'll owe.

The scheme applies to:

• Contractors: businesses that pay subcontractors for construction work, or that spend more than £3 million a year on construction
• Subcontractors: businesses and sole traders who do construction work for contractors

Construction work for CIS purposes is broad: building, demolition, repairs, decorating, installation (electrical, plumbing, heating), civil engineering, and some specialist work. Some activities are excluded — design and surveying, manufacturing materials off-site, and work on purely domestic properties (with some exceptions).

CIS registration and deduction rates

Subcontractors can be registered for CIS in one of three ways, each attracting a different deduction rate:

Gross payment status: You receive payment in full, with no deduction. To qualify, you must demonstrate to HMRC that you have complied with your tax obligations, that your turnover exceeds certain thresholds (£30,000 for a sole trader), and that your tax affairs are up to date. Gross payment status is reviewed annually by HMRC and can be removed if you fall behind on filings or payments. This is the most financially advantageous status — you receive your full payment and manage your own tax bill.

Standard registered (20% deduction rate): You are registered for CIS but don't qualify for gross payment status. The contractor deducts 20% of your labour element (not materials — see below) and pays it to HMRC. If you are registered and current with your tax affairs, the 20% rate applies.

Unregistered (30% deduction rate): If you are not registered for CIS or HMRC cannot verify your registration, the contractor deducts 30% — a higher "penalty" rate to incentivise registration. If you are working under CIS deductions, there is almost always a financial reason to register and ensure the 20% rate applies.

To register for CIS as a subcontractor, you need a Government Gateway account, your National Insurance number, your UTR (Unique Taxpayer Reference), your business details, and your UK bank account details. Registration can be done online through HMRC's CIS registration pages.

What CIS deductions apply to

Deductions apply to the labour element of a payment, not to:

• Materials: The cost of materials incorporated into the works (not tools or equipment hire) is paid in full with no CIS deduction
• VAT: If you are VAT-registered, VAT is excluded from the CIS deduction calculation
• Profit and overhead: The deduction applies to what contractors and HMRC classify as the "gross amount" — the labour and any recharges. In practice, contractors are responsible for correctly identifying the materials element, and subcontractors should ensure their invoices clearly separate labour and materials.

If you include materials in your invoice without clearly separating them, the contractor may apply the deduction to the entire invoice amount, costing you the 20% or 30% on materials you shouldn't have been deducted on. Always itemise.

How CIS deductions reduce your tax bill

CIS deductions are not a separate tax — they are advance payments of your income tax and Class 4 National Insurance. When you file your Self Assessment return:

1. You declare all your CIS income (gross, before deductions) as trading income
2. You deduct allowable business expenses to arrive at taxable profit
3. Income tax and Class 4 NI are calculated on taxable profit
4. Your total CIS deductions for the year are credited against the tax liability
5. If your deductions exceed your liability, HMRC refunds the difference

This is the most important thing for CIS subcontractors to understand: the deductions come back to you if you overpaid, provided you file your Self Assessment return. If you don't file, HMRC keeps the overpayment.

Many CIS subcontractors, particularly those with significant material costs or business expenses, find that their actual tax liability is well below the 20% deducted throughout the year. This is because CIS deductions are calculated on the gross labour payment — before expenses — whereas tax is calculated on profit after expenses. Filing your return promptly after the tax year ends means a refund in weeks rather than months.

CIS monthly returns for contractors

If you operate as a contractor as well as a subcontractor — common for trades principals who use subbies for specific work — you must file a monthly CIS return to HMRC declaring the payments made to subcontractors and the deductions taken. The monthly return must be filed by the 19th of the following month. Failure to file on time results in automatic penalties starting at £100.

This guide is primarily for subcontractors, but if you have grown your business to the point of regularly engaging subcontractors, ensure your CIS compliance as a contractor is in order.

Claiming back overpaid CIS deductions

The recovery process is via your Self Assessment return:

• Declare your gross CIS income (not the net you received)
• Deduct all allowable business expenses
• The tax calculation runs in the normal way
• Enter the total CIS deductions suffered in the relevant Self Assessment box
• HMRC applies your deductions as a credit against the tax due

If deductions exceed tax due, you receive a refund — either via bank transfer (usually the fastest, via your HMRC online account) or by cheque. HMRC typically processes refunds within 2–4 weeks of a filed return for straightforward cases.

To find your total CIS deductions for the year, check the payment and deduction statements your contractors should provide you with each month. You can also check your CIS record through your HMRC online account.

Expenses that reduce your CIS tax bill

As a CIS subcontractor, you are taxed on profits — income minus allowable expenses. The larger your allowable expenses relative to gross income, the lower your taxable profit and the larger your likely refund.

Common deductible expenses for construction subcontractors:

• Tools and equipment: If not provided by the contractor. Capital items may qualify for the Annual Investment Allowance. Consumable items are revenue expenses.
• Work clothing and PPE: Safety boots, high-visibility jackets, hard hats, and other PPE required for your trade. Regular clothing — even if worn only for work — is generally not allowable unless it is a specialist or protective item.
• Vehicle costs: Business mileage at the HMRC approved rate (45p per mile for the first 10,000 business miles), or a proportion of actual vehicle running costs.
• Phone and communications: The business proportion of mobile phone and broadband costs.
• Accountancy fees: For preparing your Self Assessment return and business records.
• Professional subscriptions: Trade union membership, industry body subscriptions.
• Materials (if you supply them): Materials that you purchase and incorporate into works are deducted from your income — you're taxed on the profit from labour, not on revenue that merely passes through your hands.

Keep all receipts and records. HMRC can open an enquiry into any Self Assessment return and request evidence for claims. Construction is an industry with a higher-than-average HMRC enquiry rate.

Employment status and the employed/self-employed distinction

CIS applies specifically to self-employed subcontractors. Workers who are employed — who work under the direction and control of a contractor, have set hours, use the contractor's tools, and have no financial risk — are employees and should be on the contractor's payroll with PAYE and NIC deducted.

HMRC has become more active about misclassification of workers in the construction industry. If you are genuinely self-employed (you bear commercial risk, supply your own tools, set your own rates, can work for multiple contractors), CIS is the right regime. If you work exclusively for one contractor under their direction, you may be a worker or employee — and different rules apply. Getting this wrong can result in HMRC collecting the unpaid employment taxes from the contractor retroactively.

For genuine subcontractors, CIS is simply a withholding mechanism — your tax position at the end of the year is the same as any other self-employed person; it's just that some of the payment has already been made on your behalf throughout the year.

Use the CIS Deduction Calculator to see how much is being deducted, and the Self Assessment Estimator to estimate your end-of-year position and likely refund or balance to pay.