The Construction Industry Scheme (CIS) changes how subcontractors in UK construction receive payment. Contractors deduct tax from subcontractor payments and send it to HMRC before the balance reaches the subcontractor’s bank account. An unregistered subcontractor has 30% of every payment withheld in advance. This guide covers the subcontractor side of the scheme: registration, the 20% and 30% deduction rates, what the deduction excludes, how sole traders and limited companies reclaim or offset deductions, and how gross payment status removes the deduction entirely. Every rate, threshold and rule below follows GOV.UK guidance verified on 19 September 2026.
What Is the Construction Industry Scheme?
The Construction Industry Scheme is an HMRC scheme requiring contractors to deduct tax from payments to subcontractors and pass the money to HMRC. Each deduction counts as an advance payment towards the subcontractor’s tax and National Insurance bill. CIS is not an extra tax. The deducted money belongs to the subcontractor’s existing liabilities, collected early. Every pound HMRC collects reduces the year-end bill by a pound.
Registration covers 3 business types working for contractors:
- Sole traders
- Limited company owners
- Partners in a partnership or trust
Employees do not register for CIS. Employers pay them through PAYE, which deducts tax and National Insurance at source under its own mechanism.
Registration controls the deduction rate. A registered subcontractor, verified by the contractor, has 20% of qualifying payments deducted. An unregistered subcontractor has 30% deducted. Registering protects 10 percentage points of every payment, which on a £1,000 invoice is the difference between £200 and £300 withheld.
How Do CIS Deductions Work for Subcontractors?
CIS deductions work by the contractor withholding a percentage of each qualifying payment, sending that percentage to HMRC and paying the balance to the subcontractor. The rate follows registration and verification status, not earnings or hours.
The table below defines the 3 CIS deduction rates set by HMRC, the status that triggers each rate and the resulting deduction on a £1,000 payment.
| Subcontractor status | Rate | Deduction on a £1,000 payment |
|---|---|---|
| Registered and verified | 20% | £200 |
| Unregistered or unverifiable | 30% | £300 |
| Gross payment status | 0% | £0 |
Gross payment status pays the subcontractor in full. The whole tax bill is then settled at year end through Self Assessment or the Corporation Tax return.
Before the first payment, the contractor verifies the subcontractor with HMRC. HMRC checks the registration and confirms which rate the contractor applies. Verification is the contractor’s duty. The subcontractor’s part is registering and supplying accurate business details.
The deduction does not apply to the whole invoice. GOV.UK excludes 5 cost categories from the calculation:
- VAT charged on the payment
- Consumable stores
- Plant hire
- Manufacturing or prefabricating materials
- Materials the subcontractor paid for directly
The contractor asks for receipts to evidence direct material costs. A subcontractor invoicing £3,000 including £1,200 of directly purchased materials has the 20% rate applied to £1,800. HMRC receives £360 and the subcontractor receives £2,640.
Each month a contractor pays a subcontractor, the contractor files a CIS monthly return and issues a payment and deduction statement showing the month’s payments and the tax deducted. Subcontractors file no monthly returns themselves. Keep every statement, because each one evidences the deductions reclaimed at year end.
Registering and structuring a construction business correctly from the start is where our contractor accountants in Newcastle service begins. Most CIS subcontractors operate as sole traders, and our self-employed and sole trader accounts service covers the annual accounts and Self Assessment filings those traders depend on.
How Do Subcontractors Reclaim or Offset CIS Deductions?
Subcontractors reclaim or offset CIS deductions through Self Assessment for sole traders and partners, or the company PAYE scheme for limited companies. The route follows the business structure. Both routes depend on the monthly payment and deduction statements.
How do sole traders and partners reclaim CIS deductions?
Sole traders and partners reclaim CIS deductions through the annual Self Assessment return. File the return, record total pay before deductions as income, and enter total CIS deductions in the CIS deductions box. HMRC offsets the deductions against the tax and National Insurance bill. A refund follows where the deductions exceed the bill. Any shortfall is due by 31 January.
A sole trader billed £50,000 before deductions suffers £10,000 of CIS deductions at 20%. A final bill below £10,000 produces a refund once the return is filed. Deductions taken across the tax year reconcile on the return filed the following January.
Stopping trading partway through the tax year opens a refund claim for deductions already suffered, because the final bill falls below the amounts HMRC collected.
How do limited companies offset CIS deductions?
Limited companies offset CIS deductions through the company PAYE scheme. Send the Full Payment Submission (FPS) as usual each payday, then add an Employer Payment Summary (EPS) carrying year-to-date CIS deductions. HMRC nets the deductions off the company’s monthly PAYE and National Insurance bill. Surplus deductions carry forward within the tax year, and the company claims a refund after year end.
A company reporting £4,000 of CIS deductions in a month against a £2,500 PAYE bill carries £1,500 forward to the next month. Any surplus left after year end is reclaimed from HMRC.
Do not settle Corporation Tax using CIS deductions through the Corporation Tax return. GOV.UK warns the method carries penalty risk. Keep form CIS132 records and every monthly statement, because these documents prove the year-to-date figures reported on each EPS.
Sending the FPS and EPS each month is standard work for our payroll services team, which manages CIS deduction reporting for company clients.
How Do You Get Gross Payment Status?
You get gross payment status by passing HMRC’s test for tax compliance, UK construction work, a business bank account and minimum turnover. With the status held, the contractor deducts 0% and pays every invoice in full. The whole tax bill is settled at year end, through Self Assessment for sole traders and partners or the Corporation Tax return for companies.
GOV.UK, verified 19 September 2026, sets 4 qualifying conditions:
- Tax and National Insurance filed and paid on time historically
- Construction work carried out in the UK
- Business income and spending run through a bank account
- Turnover above the threshold for the business structure
The turnover test measures the last 12 months, ignoring VAT and materials:
- Sole trader: at least £30,000
- Partnership: at least £30,000 per partner or £100,000 for the whole partnership
- Limited company: at least £30,000 per director or £100,000 for the whole company
- Company controlled by 5 or fewer people: £30,000 from each of them
Apply online or by post. The application also registers the business for CIS, so a new subcontractor covers both steps at once. HMRC reviews gross payment status annually and removes it where compliance slips. False information in the application risks fines for the applicant and for anyone who helped them register.
Gross payment status is a working-capital decision as much as a tax label. A subcontractor on 20% deductions forfeits £6,000 of cash across £30,000 of billings until the refund arrives. An unregistered subcontractor forfeits £9,000 on the same billings at 30%. Gross status keeps that money in the business all year, which is the reward for turnover and a clean compliance record.
Common Questions Answered
These 4 questions cover the CIS details subcontractors check most often.
How much is the CIS deduction?
The CIS deduction is 20% of the payment for a registered and verified subcontractor, 30% for an unregistered or unverifiable subcontractor, and 0% for a subcontractor holding gross payment status, who settles the full tax bill at year end instead.
Does CIS apply to employees?
No. CIS does not apply to employees. Employees pay tax and National Insurance through PAYE and never register for CIS. The scheme covers sole traders, limited company owners and partners working for contractors. Check employment status with HMRC where the position is unclear.
Are materials subject to CIS deductions?
No. Materials the subcontractor paid for directly are excluded from the deduction. VAT, consumable stores, plant hire and manufactured or prefabricated materials are excluded as well. The contractor asks for receipts to evidence the material costs.
How does a limited company subcontractor get CIS deductions back?
Through the company PAYE scheme. Send the FPS as usual and add an EPS carrying year-to-date CIS deductions each month. HMRC offsets the deductions against the PAYE bill, surplus carries forward within the tax year, and the company claims a refund after year end. Settling Corporation Tax through the return this way risks HMRC penalties.
How Aqua Accounting Can Help
Aqua Accounting helps CIS subcontractors handle the scheme end to end, as an ICAEW Registered Member Firm of Chartered Accountants. Our UK-based team has served North East businesses from Newcastle upon Tyne for over 13 years, supporting construction clients at every stage: registering, reclaiming deductions and applying for gross payment status.
We handle CIS registration, Self Assessment returns carrying CIS deductions, company FPS and EPS reporting and gross payment status applications. Subcontractors lose cash silently to the deduction rates; registering correctly, keeping the statements and offsetting on time stops the leak.
The Construction Industry Scheme rewards subcontractors who register early, keep every payment and deduction statement and plan for gross payment status. Contact Aqua Accounting to put the scheme on your side.
Disclaimer:
The information provided in this blog is for general informational purposes only and does not constitute professional advice. While every effort is made to ensure accuracy, Aqua Accounting accepts no responsibility for any actions taken based on this content. You should seek professional advice tailored to your individual circumstances.
Omar Ahmed is an ICAEW Chartered Accountant and the Director of Aqua Accounting, a UK-based accountancy practice providing expert accounting and tax services to individuals, sole traders, and small to medium-sized businesses. As a trusted accountant in Newcastle, he offers expertise in annual accounts, self-assessment tax returns, company accounts, VAT, payroll, bookkeeping, and company formation.
With a strong focus on delivering clear and practical financial advice, Omar helps clients stay compliant while improving their understanding of their finances. Through Aqua Accounting, he works closely with business owners to simplify accounting processes, meet tax obligations, and support informed financial decision-making.