CIS Deduction Rates Explained: 20%, 30% or 0% (2026/27)
Construction Industry Scheme deductions are 20%, 30% or 0% depending on your registration and verification status with HMRC. Here's exactly how contractors determine which rate to apply to a subcontractor.
Why three different rates exist
The Construction Industry Scheme requires contractors to withhold tax from payments to subcontractors, broadly analogous to PAYE but for self-employed construction workers and subcontractor companies. The rate withheld depends entirely on the subcontractor's own registration and compliance status with HMRC, not on any choice made by the contractor paying them.
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| Status | Deduction rate | Who this applies to |
|---|---|---|
| Not registered for CIS | 30% | Subcontractors who haven't registered with HMRC under CIS at all |
| Registered, standard ("net") status | 20% | The large majority of registered subcontractors |
| Gross payment status | 0% | Subcontractors who've met HMRC's stricter turnover and compliance tests |
Registering for CIS at all — even without qualifying for gross payment status — already halves the deduction rate from 30% to 20%, which is why virtually every subcontractor working regularly in construction registers, even if they don't qualify for full gross status.
What the deduction actually applies to
A common misunderstanding is that the CIS deduction is taken from the entire invoice value. It is not — it applies only to the labour element.
| Invoice component | CIS deduction applies? |
|---|---|
| Labour charge | Yes |
| Materials (properly itemised and evidenced) | No |
| VAT | No |
| Genuinely reimbursed costs (e.g., plant hire, consumables, with receipts) | No |
Worked example
A subcontractor invoices a contractor £5,000: £3,000 labour, £2,000 materials, plus VAT on top.
| Component | Amount | CIS deduction (at 20% rate) |
|---|---|---|
| Labour | £3,000 | £600 |
| Materials | £2,000 | £0 |
| VAT (20% of £5,000) | £1,000 | Not subject to CIS |
| Total invoice | £6,000 | |
| Net payment to subcontractor | £5,400 (£6,000 − £600 CIS deduction) |
Only the £3,000 labour element attracts the 20% deduction (£600), leaving the materials and VAT untouched — a frequent source of disputes when contractors mistakenly apply the deduction to the whole invoice.
The verification process
Before making the first payment to a new subcontractor, the contractor is legally required to verify them with HMRC, either through the CIS online service or CIS-compatible payroll/accounting software. HMRC's system returns the applicable rate based on the subcontractor's current record:
| Verification input | Possible outcome |
|---|---|
| Subcontractor's UTR, name/company details, National Insurance or company registration number | HMRC returns: 0% (gross), 20% (registered), or 30% (unverified/unregistered) |
Failing to verify correctly, or applying the wrong rate through error, can leave the contractor liable for underpaid CIS deductions, plus potential penalties — verification is not optional paperwork, it's the mechanism that determines the correct rate.
How CIS deductions interact with a subcontractor's final tax bill
CIS deductions are payments on account, not a final settlement of tax owed. For a self-employed sole trader subcontractor, the total CIS tax withheld throughout the year is set against their actual income tax and Class 4 National Insurance liability calculated via Self Assessment.
| Scenario | Outcome |
|---|---|
| CIS deductions withheld exceed actual tax liability | Refund due after filing Self Assessment |
| CIS deductions withheld are less than actual tax liability | Balance owed alongside the tax return |
Gross payment status: the 0% rate
To qualify for gross payment status, a subcontractor must pass HMRC's tests on:
- Business test — running a genuine construction business with UK bank account and appropriate business records.
- Turnover test — broadly, annual construction turnover above a minimum threshold (excluding VAT and materials).
- Compliance test — a clean recent record of filing tax returns and paying tax, NI, and CIS deductions on time.
Gross status must be maintained on an ongoing basis — HMRC periodically reviews compliance, and status can be withdrawn if a subcontractor later misses filing or payment deadlines, reverting them to the standard 20% (or, in more serious cases, the 30% unregistered rate) on future payments.
Use our self-employed tax calculator to model how CIS deductions interact with your final Self Assessment liability, and our sole trader take-home calculator for a broader view of net income after CIS withholding.
Frequently asked questions
What are the three CIS deduction rates?
30% for subcontractors who are not registered with HMRC for CIS, 20% for subcontractors who are registered as 'net' payment status, and 0% for subcontractors who hold gross payment status.
Which parts of a subcontractor's invoice are the CIS deduction applied to?
The deduction applies only to the labour element of the invoice, not materials, VAT, or genuinely reimbursed costs like plant hire or consumables that the subcontractor has separately purchased and can evidence with receipts.
How does a contractor find out which rate to apply?
The contractor must verify the subcontractor with HMRC (via the CIS online service or compatible payroll software) before the first payment, which returns the correct deduction rate: 0%, 20%, or 30%, based on the subcontractor's current registration status.
Can the deduction rate change during an ongoing relationship?
Yes. HMRC periodically reviews subcontractors' compliance, and a subcontractor's status (particularly gross payment status) can be withdrawn if they fail to meet ongoing compliance tests, changing the applicable deduction rate on future payments.
Are CIS deductions the final tax, or can they be reclaimed?
CIS deductions are payments on account of the subcontractor's eventual Self Assessment income tax and Class 4 National Insurance liability, not a final tax. If deductions exceed the subcontractor's actual liability, the excess is refunded after filing the tax return (sooner for limited company subcontractors, via monthly payroll-style reclaims).
Try the calculators
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