Construction Industry Scheme (CIS) Tax 2026/27: How Subcontractor Deductions Work

What CIS Is and Why It Exists

The Construction Industry Scheme (CIS) is HMRC's mechanism for collecting tax from the construction sector at source, rather than relying solely on subcontractors to declare and pay tax after the fact through Self Assessment. It applies to most construction-related work — building, alteration, repair, demolition, and related activities — carried out by subcontractors for contractors in the UK.

Contractors (businesses or individuals who pay subcontractors for construction work) must register with HMRC for CIS and are legally required to deduct tax from subcontractor payments before paying them, then pass those deductions directly to HMRC.

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The Three CIS Deduction Rates

Before paying any subcontractor, a contractor must verify their status with HMRC (via the CIS online service), which confirms the correct deduction rate to apply. Getting this wrong is the contractor's compliance responsibility, not the subcontractor's.

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What the Deduction Is Calculated On

CIS deductions are made on the labour element of a payment, not the full invoice value. Contractors must exclude the cost of materials genuinely incurred by the subcontractor (and evidenced, typically via receipts) before applying the CIS percentage.

Worked example: a registered subcontractor invoices £5,000, comprising £3,500 labour and £1,500 materials. CIS deduction applies only to the £3,500 labour element at 20% = £700 deducted. The subcontractor receives £5,000 − £700 = £4,300 (plus VAT if registered and applicable), with the £700 already paid to HMRC on their behalf.

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Why Subcontractors Often Get a Refund

CIS deductions are calculated on gross labour payment, without any allowance for the subcontractor's actual business expenses (tools, protective equipment, vehicle costs, insurance, accountancy fees, and so on). Because Self Assessment tax is calculated on net profit (income minus allowable expenses), the CIS deduction taken during the year very often exceeds the subcontractor's real tax liability once expenses are properly accounted for.

This is why CIS subcontractors should always complete their Self Assessment return promptly after the tax year ends — refunds are common, but only paid out once the return is filed and processed.

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Applying for Gross Payment Status

Gross payment status removes the CIS deduction entirely, meaning subcontractors receive full payment and manage their own Income Tax and NI through Self Assessment payments on account, similar to any other self-employed person. To qualify, HMRC applies three tests:

1. Turnover test — construction turnover (excluding materials) above a minimum threshold, currently £30,000 for a sole trader (higher combined thresholds apply for partnerships/companies with multiple partners or directors).
2. Business test — evidence the work is run as a genuine business (bank account, records, and where relevant business premises).
3. Compliance test — a clean recent history of paying tax and filing returns on time with HMRC.

Gross payment status significantly improves cash flow (no 20% held back on every payment), but removes the built-in "forced saving" that CIS deductions provide towards your eventual tax bill — subcontractors granted gross status need strong discipline to set aside money themselves for their Self Assessment payments on account, due 31 January and 31 July each year.

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Practical Checklist for CIS Subcontractors

1. Register for CIS as soon as you start subcontracting, to secure the 20% rate rather than 30%.
2. Keep material cost evidence separate from labour invoicing, since materials shouldn't be subject to CIS deduction.
3. Track all allowable business expenses throughout the year — this is what typically turns a CIS deduction into a genuine refund.
4. File your Self Assessment return promptly after the tax year ends (deadline 31 January following the tax year for online returns) to receive any refund as early as possible.
5. Consider gross payment status once turnover qualifies, weighing the cash flow benefit against the discipline needed to self-manage tax payments.