Answers · UK 2025/26

What CIS deduction rate applies to subcontractors in the construction industry?

Under the Construction Industry Scheme, contractors deduct 20% from payments to subcontractors registered with HMRC, 30% from unregistered subcontractors, or 0% if the subcontractor holds Gross Payment Status. The deduction applies only to the labour element of a payment, not to the cost of materials.

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The Construction Industry Scheme (CIS) requires contractors in the construction sector to deduct money from payments to subcontractors and pass it to HMRC as an advance payment towards the subcontractor's Income Tax and National Insurance. **The three deduction rates** - **20%**: the standard rate, applied to subcontractors who are registered with HMRC under CIS. - **30%**: applied to subcontractors who are not registered with HMRC under CIS. Because registration is free and straightforward, the higher rate is a deliberate incentive to register. - **0% (Gross Payment Status)**: subcontractors who qualify for Gross Payment Status (GPS) receive payments with no deduction at all, and instead pay their Income Tax and National Insurance directly through Self Assessment at the normal deadlines. **What the deduction applies to** Crucially, the CIS deduction only applies to the labour element of a payment. Materials, VAT, and certain other costs (such as plant hire from a third party, fuel, and consumables) are excluded from the calculation, provided the subcontractor can show evidence of what they paid. **Worked example** A registered subcontractor invoices a contractor £5,000 for a job: £3,000 labour and £2,000 materials. CIS is deducted only from the labour element: £3,000 x 20% = £600. The contractor pays the subcontractor £4,400 (£5,000 - £600) and pays the £600 to HMRC on the subcontractor's behalf. **Qualifying for Gross Payment Status** To obtain GPS, a subcontractor must pass three HMRC tests: 1. **Turnover test**: net construction turnover of at least £30,000 in the preceding 12 months (for a sole trader; different thresholds apply for partnerships and companies). 2. **Compliance test**: all tax returns filed on time and all tax paid on time for the previous 12 months. 3. **Business test**: the business is run through a bank account and demonstrably operates as a genuine construction business in the UK. **Reclaiming CIS deductions** CIS deductions are not a final tax -- they are set against the subcontractor's actual Income Tax and Class 4 National Insurance liability when they file their Self Assessment return. If more CIS was deducted over the year than the subcontractor actually owes, HMRC refunds the difference. Limited company subcontractors reclaim CIS deductions by offsetting them against their PAYE/NIC liabilities as an employer, or by claiming a repayment. **2026 changes** From 6 April 2026, HMRC gained stronger powers to remove Gross Payment Status immediately, without the usual review period, where it believes a business knew or should have known it was part of a tax-fraudulent supply chain -- part of a wider tightening of CIS compliance rules.