If you’re one of the 1.2 million people who work in the UK’s construction sector, either as a contractor or subcontractor, you need to know how the Construction Industry Scheme (CIS) affects how you deal with income tax.
Since CIS was updated in April 2026, it’s even more important to stay on top of things, particularly as HMRC can impose tougher penalties if it believes you knew, or should have known, about fraud in your supply chain.
Whether you’re already managing payments, confused by deductions on your payslip, or simply want to understand the basics, read on to learn how CIS works and how it affects you.
In a nutshell: The Construction Industry Scheme (CIS) is a system that collects tax from self-employed construction workers as they’re paid, reducing big tax bills at the end of the year. It requires contractors to check subcontractors’ CIS registration status and deduct tax from their payments, while subcontractors must claim any overpaid tax via their tax return. Making Tax Digital tools can make CIS admin easier to manage.
The basics of the Construction Industry Scheme (CIS)
The Construction Industry Scheme (CIS) is a tax framework that was initially set up by HMRC in 1971 to make sure tax gets paid in the construction sector. It was designed to tackle the risks of a sector with so many workers who were mobile and paid in cash by collecting tax and National Insurance upfront from payments to self-employed workers.
It means that instead of contractors (like construction businesses) paying subcontractors (like electricians or plumbers) in full, they withhold the tax portion and send it directly to HMRC. This then acts as a prepayment towards the subcontractor’s tax and National Insurance bill at the end of the year.
These deductions only apply to the labour part of an invoice though. Materials, plant hire, fuel, and manufacturing costs are paid in full.
How does the Construction Industry Scheme work?
Here’s how CIS works in practice:
A contractor wins a project
They hire a subcontractor
The contractor verifies the subcontractor’s tax status with HMRC before making the first payment (HMRC can fine the contractor if this isn’t done)
The contractor pays the subcontractor, minus the tax deduction, and gives them a Payment and Deduction Statement (the equivalent of a payslip)
The contractor sends deductions to HMRC each month
CIS tax rates
HMRC uses three fixed deduction rates for subcontractors, depending on their registration status.
Rate | Who it applies to |
|---|
| Subcontractors registered under CIS |
| Unregistered subcontractors or those HMRC can’t verify (eg subcontractors whose details don’t match HMRC records) |
0% (Gross Payment Status) | Businesses with a clear tax history and high turnover |
While subcontractors don’t have to register for CIS, it’s usually worth doing – otherwise you’ll lose an extra 10% of your labour income to the higher tax rate.
To qualify for the 0% Gross Payment Status, you’ll need to submit an application online to HMRC and meet their eligibility criteria.
VAT Domestic Reverse Charge (DRC)
If you’re both VAT-registered and CIS-registered, the VAT Domestic Reverse Charge (DRC) changes how your cash flow works.
Subcontractors don’t charge VAT on their invoices to VAT-registered contractors
Instead, the contractor accounts for the VAT themselves on their VAT return
The removal of this step means subcontractors can no longer hold onto (and earn interest on or use as a buffer) the temporary tax pot they used to keep before paying HMRC. So if you’re a subcontractor, you’ll need to plan for a tighter cash flow.
Who does CIS apply to?
The Construction Industry Scheme applies to sole traders, partnerships, and limited companies that operate in the construction industry. It doesn’t apply to standard employees earning through PAYE.
Note: Being CIS registered doesn’t automatically make you a subcontractor – use HMRC’s Check Employment Status for Tax tool to clarify your status.
Contractors
There are two types of contractors under CIS:
Mainstream contractors: Typical construction businesses that pay subcontractors
Deemed contractors: Non-construction businesses (eg housing associations) whose construction costs are over £3 million over a rolling 12-month period
There’s also a new anti-fraud rule to be aware of – under HMRC’s “knew or should have known” principles, a contractor that didn’t do their due diligence can be held directly liable if tax evasion happens anywhere in their supply chain.
These rules got sharper from April 2026. If HMRC decides a contractor knew, or should have known, that a payment or return was connected to fraud, it can now cancel their Gross Payment Status immediately, charge a penalty of up to 30% of the tax lost, and stop them reapplying for five years (up from one year previously).
Subcontractors
Registering for CIS is optional, but it’s typically worth doing. If you don’t register, you’ll have to pay the 30% higher deduction rate, which means giving up an extra 10% of your labour income.
What work does CIS cover?
CIS applies to most on-site construction work that involves labour, including:
Site clearing
Excavation
Structural building
Alterations and repairs
Demolition
Installing systems like heating, power, and water
Work CIS doesn’t cover includes:
Professional fees (eg architects or surveyors)
Carpet fitting
Delivering materials
Payments to local authorities and specific public bodies (eg government departments)
What are the benefits of CIS?
Contractor CIS benefits | Subcontractor CIS benefits |
|---|
Reduces HMRC audit risks by creating a clear digital record of your payments | Spreads your tax liability evenly across the year, avoiding a big end-of-year payment |
Ensures you only hire legitimate, tax-compliant tradespeople | May trigger an annual refund as flat deductions ignore your personal tax-free allowance and business expenses |
Prevents costly back-tax issues by establishing a clear legal boundary between self-employed workers and employees | Proves your business is legitimate, boosting your credibility with major contractors |
Eliminates manual payroll by allowing modern accounting tools to automate calculations and filings | Achieving Gross Payment Status means you’ll receive full invoice payments |
How to register for CIS
To register for CIS, you’ll need your:
Legal business name
Unique Taxpayer Reference (UTR)
VAT registration number (if applicable)
The date you started trading
If you’re a limited company or partnership, you may also need your:
Company Registration Number
National Insurance number
Partner details
The quickest way to register is online using HMRC’s website. But if you can’t register online, you can send a registration form by post.
How to file monthly CIS returns
To comply with the Construction Industry Scheme, you’ll need to submit a CIS return to HMRC by the 19th of each month.
Note: If you didn’t pay any subcontractors during a month, you’ll still need to file a return, showing your payments were £0 (known as a ‘nil return’) or inform HMRC that you’ve temporarily stopped using subcontractors. Since April 2026, a late return triggers an automatic £100 penalty, rising to £200 after two months and more the longer it’s left, so it’s worth setting a reminder.
How to claim a CIS refund
Because the CIS tax rate doesn’t account for personal tax allowances or business expenses, subcontractors are often charged more tax than is accurate. Fortunately, the tax is relatively straightforward to reclaim.
Sole traders: You can claim the overpaid tax through your annual Self Assessment tax return.
Limited companies: You can offset CIS deductions against your monthly PAYE and National Insurance payments using an Employer Payment Summary. If you’ve overpaid by the end of the tax year, you can claim the balance back online through the Government Gateway.
Note: Make sure your past PAYE, CIS, and Corporation Tax returns are up to date, as HMRC will reject or freeze your refund claim if they’re not.
How to deregister from CIS
If your business stops trading or stops using subcontractors, you’ll need to deregister from CIS.
You can do this in one of two ways:
Before you deregister, you’ll need to complete any outstanding CIS returns, settle any deductions owed, and claim any excess refund so you don’t miss out.
CIS and Making Tax Digital (MTD)
If you’re a sole trader subcontractor, CIS deductions change how you use the Making Tax Digital (MTD) income tax reporting system.
Normally, HMRC looks at your take-home pay to decide if you need to use MTD. But with CIS, they use your total earnings before any deductions (your gross income).
For example, if you invoice £52,000 in a year but take home £41,600 after a 20% CIS deduction, HMRC would still see you as earning £52,000. Because that’s over the £50,000 qualifying income threshold, you’d need to start using MTD for your income tax. You’d have to switch to digital record-keeping, use MTD-compliant tools, and send HMRC digital updates four times a year instead of one annual return.
Wrapping up
The Construction Industry Scheme (CIS) affects construction workers and employers, whether you’re a contractor managing payments or a subcontractor receiving them. So if you work in the trade, understanding CIS will help you keep your cash flow healthy and avoid penalties.
Here’s a reminder of the key points:
CIS is HMRC’s way of collecting tax upfront from self-employed construction workers to reduce tax evasion
Contractors deduct tax from the labour portion of subcontractors’ invoice payments and send it to HMRC
There are three deduction rates: 20% for registered subcontractors, 30% for unregistered ones, and 0% for those with Gross Payment Status
VAT-registered subcontractors don’t charge VAT on invoices to VAT-registered contractors under the Domestic Reverse Charge
You must file monthly CIS returns by the 19th of each month, even if you haven’t made any payments that month
Subcontractors can reclaim overpaid tax through Self Assessment or PAYE offsets if they operate through a limited company
Making Tax Digital (MTD) tools can simplify CIS admin, giving you more time to focus on your trade
FAQs
What happens if you don't register for CIS?
If you’re a subcontractor and don’t register for CIS, contractors will deduct 30% tax from the labour portion of your invoices instead of the standard 20%. You can claim it back later, but you’ll lose the immediate cash flow
If you’re a contractor, not registering for CIS can result in fines for each missed monthly return. And if you deduct the wrong amount from a subcontractor, HMRC can charge you the difference plus interest and penalty fees.
Is domestic reverse charge the same as the Construction Industry Scheme?
The domestic reverse charge (DRC) and the Construction Industry Scheme (CIS) are separate things, but they are linked.
| DRC | CIS |
|---|
| | Income tax and National Insurance on the labour portion of an invoice |
| VAT-registered subcontractors and contractors | Self-employed tradespeople in the construction sector |
| Subcontractor charges 0% VAT, contractor accounts for VAT themselves on their VAT return | Contractor deducts tax before paying subcontractor |
If a subcontractor is VAT-registered and working for a VAT-registered main contractor, both DRC and CIS rules apply at the same time on the same invoice.
How does CIS compare to PAYE?
CIS and PAYE both take tax from earnings before you get paid, but they work for different types of workers.
PAYE is for employees: It uses your tax code to work out the exact deductions and includes rights like holiday pay and pensions.
CIS is for self-employed subcontractors: It takes a flat 20% or 30% from labour costs and doesn’t include any employment rights.
What changed with CIS in April 2026?
HMRC reformed CIS from 6 April 2026 to tighten compliance across the sector. Contractors must now file a return every month (even if they haven’t paid any subcontractors), payments to local authorities and certain public bodies are exempt from CIS altogether, and HMRC can immediately cancel a contractor’s Gross Payment Status (plus charge penalties of up to 30%) if it’s found they knew, or should have known, about fraud in their supply chain.
Do sole traders need to register for CIS?
If you’re a sole trader subcontractor, registration is optional, but most people register anyway. Unregistered subcontractors have 30% deducted from their labour income instead of the standard 20%, so registering usually means more money in your pocket each month.
What’s the difference between CIS deductions and Gross Payment Status?
With CIS deductions, a contractor withholds 20% (or 30%, if you’re unregistered) of your labour income and pays it to HMRC as an advance towards your tax bill.
With Gross Payment Status, you’re paid in full, with no deductions, and you deal with your tax and National Insurance directly with HMRC. To get Gross Payment Status, you’ll need to apply to HMRC and meet their eligibility criteria, and keep meeting them to hold onto it.
Photo by Héctor Emilio Gonzalez on Unsplash
