CIS Deduction Rates Explained: 0%, 20%, and 30% — Who Pays What

If you run a construction business in the UK, whether as a contractor or subcontractor, CIS is likely part of your regular admin. A key question is how much a contractor should deduct from a subcontractor’s payment before it reaches their bank account.

The answer depends on the subcontractor’s CIS status. HMRC applies one of three deduction rates: 0%, 20%, or 30%. Applying the wrong rate can create cash flow issues, inaccurate tax records, and possible HMRC penalties. HMRC confirms the applicable rate when the contractor verifies the subcontractor.

What are CIS deductions?

CIS deductions are amounts withheld by contractors from payments made to subcontractors for qualifying construction work. The contractor pays these deductions to HMRC, where they count as advance payments towards the subcontractor’s Income Tax and National Insurance liabilities.

In simple terms, the process works as follows:

1. A subcontractor sends an invoice for construction work completed.
2. The contractor verifies the subcontractor with HMRC.
3. HMRC confirms the appropriate CIS deduction rate.
4. The contractor calculates the deduction on the relevant labour element.
5. The contractor pays the subcontractor the net amount and pays the deduction to HMRC.

CIS is designed to improve tax compliance across the construction sector. However, contractors must manage the scheme carefully, especially where invoices include labour, materials, VAT, and plant hire.

CIS deduction rates explained

There are three CIS deduction rates. The rate depends on the subcontractor’s registration and gross payment status.

0% rate: Gross payment status

The 0% rate applies to subcontractors with gross payment status. This means the contractor pays the subcontractor in full without making CIS deductions. The subcontractor remains responsible for managing their own tax and National Insurance through Self Assessment or company tax reporting.

Gross payment status can support stronger cash flow because the business receives the full value of each invoice. However, it is not automatic. HMRC requires the subcontractor to meet business, turnover, and tax compliance requirements before granting this status.

The business must generally be operating in the UK construction industry, make HMRC payments electronically, meet the relevant turnover test, and maintain a good tax compliance record. This includes filing returns and paying tax on time.

For construction businesses seeking gross payment status, accurate bookkeeping is essential. Late returns, unpaid liabilities, and poor records can affect an application or lead to the status being withdrawn.

20% rate: Standard CIS deduction

The 20% rate is the standard CIS deduction rate. It applies to subcontractors who are registered for CIS but do not have gross payment status.

This is the rate most self employed construction workers and subcontractors experience. The contractor deducts 20% from the part of the invoice subject to CIS, then pays the balance to the subcontractor.

The amount deducted is not an additional tax charge. It is an advance payment towards the subcontractor’s eventual tax liability. A sole trader can claim the deduction through their Self Assessment tax return, while a limited company may offset suffered deductions against PAYE and National Insurance liabilities through the Employer Payment Summary process.

30% rate: Higher CIS deduction

The 30% rate usually applies where a subcontractor is not registered for CIS or cannot be verified by HMRC.

This significantly affects cash flow. A subcontractor paid under the 30% rate receives substantially less upfront than one registered under the standard 20% rate.

For example, if £1,000 of an invoice is subject to CIS, a 20% deduction would be £200, while a 30% deduction would be £300. Registering correctly with HMRC should therefore be a priority for subcontractors who want to avoid unnecessary deductions.

How is a CIS deduction calculated?

CIS is not calculated on the full invoice total. Contractors must identify the amount subject to deduction before applying the confirmed rate.

HMRC says contractors should start with the gross invoice amount and deduct qualifying exclusions before calculating CIS. These exclusions can include VAT, materials paid for directly by the subcontractor, consumable stores, certain fuel costs, and plant hire for the relevant job.

The subcontractor should provide clear evidence for direct materials costs, such as receipts or itemised invoices. If suitable evidence is unavailable, the contractor may need to estimate a reasonable materials amount.

CIS deduction example

Assume a subcontractor submits an invoice of £1,000 excluding VAT:

At the 20% standard rate:

At the 30% higher rate:

The key point is that the percentage applies to the labour element after allowable exclusions, not automatically to the entire invoice.

Who is responsible for CIS deductions?

The contractor is responsible for operating CIS correctly. This includes verifying the subcontractor, using the rate HMRC provides, making deductions where required, filing monthly CIS returns, and paying deductions to HMRC.

A contractor must also provide a payment and deduction statement to the subcontractor within 14 days of the end of each tax month. For example, for the tax month from 6 May to 5 June, the statement must be issued by 19 June.

Subcontractors should:

• Register for CIS to avoid the 30% rate
• Keep every payment and deduction statement
• Ensure invoices separate labour, materials, VAT, and plant hire clearly
• Maintain records for Self Assessment or company accounts
• Check whether they could qualify for gross payment status
• Reclaim any excess deductions through the appropriate HMRC process

Reporting CIS deductions to HMRC

Contractors must submit a monthly CIS return showing the subcontractors paid, the gross amounts, material costs, and deductions made. Returns are usually due by the 19th of the following month.

The contractor should also pay the deductions to HMRC by the appropriate deadline. Late submissions and late payments may lead to penalties, so construction businesses should build CIS administration into their monthly bookkeeping schedule.

Strong record keeping is particularly important where a construction business uses several subcontractors, works across multiple sites, or pays a mixture of sole traders and limited companies.

Can subcontractors reclaim CIS deductions?

Yes. CIS deductions are advance payments, so a subcontractor may be able to reclaim money if the deductions exceed their final tax liability.

Sole traders and partners generally claim deductions through their Self Assessment tax return. HMRC offsets the deductions against the tax owed, then issues a refund if too much has been paid.

Limited companies that suffer CIS deductions can normally report these through an Employer Payment Summary. The deductions can be offset against PAYE and National Insurance liabilities. If a credit remains, the company may be able to carry it forward, request repayment, or offset it against other HMRC liabilities where permitted.

When does CIS not apply?

CIS does not cover every payment linked to the construction industry. It generally does not apply to pure materials only supplies, standard employment arrangements, or certain professional services such as architecture and surveying.

It may also not apply to private domestic clients who are not operating a construction business. However, some situations are more complex, especially mixed supply and labour invoices, design and build contracts, security installations, and plant arrangements.

Where a payment includes both CIS and non CIS elements, getting the invoice split right is vital. A construction accountant can help assess the treatment before an incorrect deduction leads to an HMRC issue.

How Construction Tax Accountants can help

CIS compliance is not only about applying 0%, 20%, or 30%. It also depends on accurate contractor verification, correctly identifying labour and material costs, timely returns, and effective tax planning.

Construction Tax Accountants can help contractors and subcontractors manage their CIS responsibilities with confidence while improving cash flow and reducing the risk of HMRC errors.

• Verify subcontractors with HMRC before payments are made
• Confirm the correct 0%, 20%, or 30% deduction rate
• Prepare and submit monthly CIS returns accurately and on time
• Create compliant payment and deduction statements for subcontractors
• Review invoices to separate labour, materials, VAT, and plant hire correctly
• Help subcontractors apply for gross payment status where eligible
• Support sole traders with CIS claims through Self Assessment
• Help limited companies offset CIS suffered against PAYE and National Insurance
• Reconcile CIS records with bookkeeping, payroll, VAT, and year end accounts
• Provide construction focused tax planning to protect cash flow and maintain compliance

Frequently asked questions