In construction, tax is often taken before you are even paid. The Construction Industry Scheme sets the rules, and getting registered is the difference between a 20% and a 30% deduction.
In most jobs, tax comes out after you get paid. In construction, it often comes out first. The Construction Industry Scheme means that before a subcontractor sees a penny of their labour payment, the contractor has already sliced off 20% (or 30%) and sent it to HMRC. For a self-employed bricklayer or electrician, this upends the usual cash-flow logic, and it is the single most common reason construction workers end up owed a tax refund.
The Construction Industry Scheme splits the construction world into two roles, and many businesses are both at once.
When a contractor pays a subcontractor, they withhold a percentage of the labour element and send it to HMRC. That money is credited against the subcontractor's eventual tax bill. Because most subcontractors operate as self-employed sole traders, CIS sits on top of the normal Self Assessment system rather than replacing it.
The rate a contractor applies depends entirely on the subcontractor's CIS status.
| Status | Deduction rate | Who it applies to |
|---|---|---|
| Registered | 20% | Subcontractors registered for CIS with HMRC |
| Not registered | 30% | Subcontractors who have not registered |
| Gross payment status | 0% | Firms passing HMRC's turnover and compliance tests |
The jump from 20% to 30% is effectively a penalty for not registering, so registration is almost always worthwhile. Gross payment status, where nothing is deducted and the subcontractor handles all their own tax, is reserved for businesses that meet a minimum turnover threshold and have a clean compliance history. Crucially, deductions apply only to the labour portion: materials, plant hire and VAT are excluded.
Take Liam, a self-employed plasterer registered for CIS. A contractor pays him £4,000 for a job in 2025/26, of which £1,000 is materials he supplied and £3,000 is labour.
| Step | Amount |
|---|---|
| Total invoice | £4,000 |
| Less materials (not subject to deduction) | £1,000 |
| Labour subject to CIS | £3,000 |
| CIS deduction at 20% | £600 |
| Liam receives | £3,400 |
The £600 is sent to HMRC by the contractor and credited to Liam. At year end, Liam files his Self Assessment return. His actual tax is calculated on his profit after deducting his expenses (tools, van, materials, insurance), and the £600 plus all his other CIS deductions are set against that figure. Because the 20% was taken off his labour before expenses, his real liability is often lower, leaving him a refund. The CIS calculator estimates the deduction and likely refund for your figures, and our blog covers expense claims for construction workers.
The key insight is that CIS deducts 20% from gross labour, but you are only ever taxed on profit. The deduction takes no account of your expenses, your Personal Allowance, or the fact that the first £12,570 of profit is tax-free. So a subcontractor with significant tool, travel and material costs frequently finds that the deductions across the year exceed their actual liability. Filing the Self Assessment return is what unlocks that overpaid tax. Failing to file, or filing late, simply leaves your own money sitting with HMRC, which is why the annual return matters even when the deductions feel like the tax is "already paid".
CIS deducts 20% from your labour before any expenses or allowances, so for many subcontractors the year-end return is less a bill and more a refund waiting to be claimed.
TapTax connects to your bank, categorises expenses automatically, and submits quarterly updates to HMRC. Free plan, no card required.
