CIS Deductions Explained: A Complete Guide for Contractors
How CIS deductions actually work, what gets deducted and what doesn't, and how to keep the paperwork straight without a spreadsheet headache.
What CIS deductions are
The Construction Industry Scheme is HMRC's way of collecting tax from subcontractors at source. When a contractor pays a subcontractor for construction work, they hold back a percentage and send it to HMRC as an advance on the subcontractor's tax bill. The subcontractor gets the rest.
It isn't an extra tax. It's your tax, paid early. You settle up at year end through Self Assessment if you're a sole trader, or through your company's payroll and Corporation Tax if you run a limited company.
The three deduction rates
Which rate a contractor uses comes down to your status with HMRC, which they check by verifying you before the first payment.
- 20% if you're registered for CIS. This is the standard rate for most subcontractors.
- 30% if you're not registered, or if HMRC can't match your details when the contractor verifies you. Registering is free and drops you to 20%, so there's rarely a good reason to sit on 30%.
- 0% if you hold gross payment status, where you're paid in full and handle all the tax yourself.
What the deduction is actually taken from
This is where money quietly goes missing. CIS only comes off the labour part of your invoice. It doesn't touch materials, the plant hire you've paid for, or VAT.
- Labour: deducted.
- Materials you've paid for and are recharging: not deducted, as long as you show them separately.
- VAT: never part of the CIS calculation.
Always split labour from materials
If you lump labour and materials into one figure, the contractor has to deduct on the whole lot, and you wait until your tax return to claw the difference back. On a job with a few grand of materials in it, that's real cash sat with HMRC for months. Breaking it out on the invoice keeps that money in your account where it belongs.
What you should get back from the contractor
Within 14 days of the end of each tax month, which runs from the 6th to the 5th, the contractor has to give you a payment and deduction statement. Keep every one. It's your proof of the tax already paid, and it's what you reconcile against at year end.
If a contractor is slow with statements, chase them. Without the paperwork you can struggle to prove the deductions when you file.
Claiming the deductions back
Sole traders put their total CIS deductions on the Self Assessment return. HMRC offsets them against the income tax and Class 4 National Insurance you owe, and refunds anything left over. Plenty of subcontractors get a refund most years, because the 20% taken at source is more than their final bill once expenses are counted.
Limited companies do it differently. You reclaim CIS deductions through your payroll scheme on the monthly Employer Payment Summary, setting them against the PAYE and CIS you owe as an employer.
Where it goes wrong
The scheme itself is simple. The mistakes that cost money are nearly always the same handful.
- Not splitting labour from materials, so you're over-deducted and out of pocket until year end.
- Losing payment and deduction statements, so you can't prove what was taken.
- Using a slightly different trading name to the one HMRC has, which can fail verification and push you to 30%.
- Leaving registration until after the first job, so the first contractor deducts 30% instead of 20%.
How Traddie helps
Traddie keeps a CIS rate against each contractor you work for, so every invoice applies the right deduction to the labour and leaves materials and VAT alone. It records the net figure, holds the deduction history in one place, and produces statements you can hand straight to your accountant. No formulas, no separate spreadsheet to keep in step.