Comparison Guide · Tax · Construction · 2026
CIS vs PAYE for Construction Workers 2026 — Which Is Better?
Construction workers can operate under CIS — receiving gross payments with 20% (or 30%) deducted at source as a self-employed subcontractor — or under PAYE as an employee, with tax deducted through a tax code. The difference in take-home pay is real but smaller than many assume once sick pay, holiday entitlement, pension auto-enrolment and employment rights are factored in.
TL;DR — 30-Second Summary
- • CIS: self-employed, 20% deducted at source — lower NI (Class 4), but no sick pay, holiday pay or pension auto-enrolment
- • PAYE: employed, tax via tax code — full employment rights, SSP, holiday pay, employer pension contributions
- • Higher gross rates under CIS typically offset the missing benefits — but not always by as much as assumed
- • CIS gross status allows no deduction — apply via HMRC if turnover exceeds £30,000
CIS vs PAYE: The Key Differences
| Feature | CIS Subcontractor | PAYE Employee |
|---|---|---|
| Employment status | Self-employed | Employee |
| Tax deduction method | 20% (registered) or 30% (unregistered) at source | Via PAYE tax code |
| Class of NI | Class 4 (6%/2%) + Class 2 | Class 1 (8%/2%) |
| Employer NI cost | None (no employer) | Employer pays 15% on earnings above £5k |
| Statutory Sick Pay | No entitlement | Yes — £123.25/week up to 28 weeks (2026/27) |
| Statutory holiday pay | No entitlement | Yes — 5.6 weeks/year |
| Pension auto-enrolment | No (must arrange own) | Yes — minimum 3% employer contribution |
| Unfair dismissal protection | No | Yes — after 2 years continuous employment |
| Redundancy pay entitlement | No | Yes — after 2 years |
| Tax return required | Yes — annual Self Assessment | Usually not (employer handles PAYE) |
| Typical day rate premium | Higher — to compensate for missing benefits | Lower — benefits included |
How CIS Deductions Work in Practice
CIS applies to payments from contractors to subcontractors for construction work in the UK. The contractor acts as a tax collector on behalf of HMRC:
- Materials deduction: CIS deductions are calculated only on the labour element of the invoice — materials, plant hire and VAT are excluded from the calculation. If you invoice for £1,000 labour + £500 materials, the 20% deduction applies only to the £1,000 labour element (£200 deducted).
- Unregistered rate: contractors must deduct 30% from any subcontractor they cannot verify with HMRC as registered. Always register with CIS before you start work on a construction site to avoid the 30% rate.
- Gross status: subcontractors who meet HMRC's compliance and turnover tests receive payment in full — no deduction. They then pay all tax and NI themselves via Self Assessment on 31 January. Gross status is particularly advantageous for cashflow as you receive the full invoice value immediately.
- Monthly contractor returns: the contractor submits a monthly CIS return to HMRC reporting all payments made and deductions taken. This creates a paper trail that HMRC cross-references with the subcontractor's Self Assessment return.
National Insurance: The Numbers Compared
National Insurance is where the difference between CIS and PAYE is most financially significant — and most often misunderstood.
PAYE Employee (Class 1, 2026/27):
- Employee pays: 8% on earnings between £12,570 and £50,270; 2% above £50,270
- Employer pays: 15% on earnings above £5,000 (Secondary Threshold — raised from £9,100 in April 2025)
- The employer NI cost does not come out of your gross pay, but it does increase the total cost of employing you, which can affect the wages offered
CIS Subcontractor (Class 4, 2026/27):
- Class 4: 6% on profits between £12,570 and £50,270; 2% above £50,270
- Class 2: £3.45 per week (£179.40/year) — a flat-rate contribution qualifying you for the State Pension, Maternity Allowance and ESA
- No employer NI — there is no employer to pay it
Example: A construction worker with £40,000 of net profit under CIS pays approximately £1,659 in Class 4 NI (6% of £27,430) + £179 in Class 2 = approximately £1,838 total NI. An equivalent PAYE employee on £40,000 gross pays approximately £2,194 in Class 1 NI (8% of £27,430 + 2% of nothing above £50,270). The CIS worker saves approximately £356 in NI on the same gross earnings.
Employment Rights: What PAYE Gives You
The employment rights gap between CIS and PAYE is substantial, and must be factored into any comparison:
- Statutory Sick Pay (SSP): PAYE employees who are off work ill for more than 3 days (the waiting days) are entitled to SSP of £123.25/week in 2026/27, for up to 28 weeks. For a construction worker who breaks a wrist on site and is off for 3 months, this is approximately £1,600 in SSP — received on top of any employer contractual sick pay. A CIS subcontractor receives nothing.
- Holiday pay: PAYE employees are entitled to 5.6 weeks of paid annual leave per year (28 days for a 5-day week worker, including 8 bank holidays). At an average weekly earnings of £800, this is worth approximately £4,480/year. CIS subcontractors have no statutory holiday entitlement — any rest they take is unpaid.
- Pension contributions: PAYE employees eligible for auto-enrolment receive at least 3% of qualifying earnings in employer pension contributions. On a £40,000 salary, qualifying earnings are approximately £28,845 — the employer contributes at least £865/year. Over a 30-year career, this employer contribution (with investment growth) could be worth significantly more than the NI saving from CIS status.
- Redundancy and unfair dismissal: PAYE employees with 2+ years of continuous service have statutory redundancy pay entitlement (based on age, weekly pay and length of service) and unfair dismissal protection. CIS subcontractors have neither — a contractor can simply stop using a subcontractor at any time without any legal obligation.
The Self Assessment Process for CIS Workers
Every CIS subcontractor must register for Self Assessment and file an annual tax return, even if CIS deductions have covered the full tax liability. The Self Assessment process for a CIS worker:
- Register for Self Assessment with HMRC (online at gov.uk/self-assessment)
- Gather all CIS deduction statements from contractors (they must provide these monthly)
- Declare total CIS income on the Self Employment pages of your Self Assessment return
- Deduct allowable business expenses: tools, protective equipment, safety training, vehicle costs for business travel, work clothing, accountancy fees
- Declare CIS deductions received during the year — these are credited against your total Income Tax and NI liability
- Pay any balance due (or receive a refund) by 31 January
CIS subcontractors commonly receive tax refunds — particularly those working intermittently, incurring significant materials costs, or working on several sites with different contractors. The refund arises because CIS deductions are made on gross labour income without accounting for allowable expenses. When expenses are deducted in the Self Assessment return, the actual tax liability is lower than the deductions made.
CIS Gross Payment Status
Gross payment status is the holy grail for CIS subcontractors with stable, high turnover: you receive every pound you invoice and settle the tax entirely yourself via Self Assessment.
To qualify, you must satisfy all three tests:
- Business test: you must be a sole trader, partnership or company carrying on a construction business in the UK
- Turnover test: net turnover (excluding VAT and materials) must exceed £30,000 for a sole trader in the 12 months preceding the application. Higher thresholds apply for partnerships (£30,000 per partner, minimum £100,000 in total) and companies (£30,000 per director with construction experience)
- Compliance test: you must have a clear 12-month tax compliance record — all Self Assessment returns filed on time, all VAT returns filed on time (if VAT-registered), all Income Tax and NI paid on time, no outstanding debts to HMRC
Gross status can be withdrawn by HMRC if you fail the compliance test at any point — typically triggered by a late filing or missed payment. It is reviewed annually. Losing gross status means returning to 20% deductions at source, which creates significant cashflow disruption for businesses that have planned around receiving gross payments.
When Contractor Status Is Worth It
Operating as a CIS subcontractor is financially worthwhile when:
- You consistently command a day rate premium of at least 15-20% over equivalent PAYE employment
- You can self-fund the equivalent of sick pay and holiday through reserves or income protection insurance
- You make regular personal pension contributions to replace the missing employer contribution
- You are comfortable with the administrative burden of Self Assessment
- You work for multiple contractors and value the flexibility to move between sites and employers
If you are working continuously for one main contractor on an ongoing basis, HMRC may consider the arrangement a sham self-employment — effectively an employment relationship disguised as CIS subcontracting. HMRC's employment status tests (used to determine whether IR35-style rules apply) assess control, mutuality of obligation and the right of substitution. Being placed under CIS by a contractor does not automatically make you self-employed for tax purposes — the actual working arrangements determine your true employment status.