What Is a CIS Deduction?
CIS Deduction
In construction, tax often comes out of your pay before you receive it. The CIS deduction is that slice, taken by the contractor and sent to HMRC as an advance on your tax bill.
- What Is a CIS Deduction?
- A CIS deduction is the amount a contractor withholds from a subcontractor's labour payment under the Construction Industry Scheme and pays to HMRC as an advance towards the subcontractor's Income Tax and National Insurance, normally 20% for registered subcontractors and 30% for unregistered ones.
For most workers, tax is taken after they are paid. In construction it is often taken first. The CIS deduction is the amount a contractor slices off a subcontractor's labour payment and sends straight to HMRC before the subcontractor sees it. It is not a separate tax, it is an advance on the subcontractor's own Income Tax and National Insurance, but because of how it is calculated, it is also the single biggest reason construction workers end up owed money at year end.
- A CIS deduction is money a contractor withholds from a subcontractor's labour payment and pays to HMRC.
- It is an advance towards the subcontractor's Income Tax and National Insurance, not an extra charge.
- Registered subcontractors have 20% deducted; unregistered ones have 30%; gross payment status means 0%.
- Deductions apply only to labour, not to materials, plant hire or VAT.
- Because it is taken before expenses and allowances, the deduction often exceeds the real tax due, creating a refund.
What the Deduction Applies To
A CIS deduction is never taken from the whole invoice. It is calculated only on the labour element of a payment for construction work. The cost of materials the subcontractor supplies, plant hire, and any VAT are all excluded, provided they are clearly itemised. This makes accurate invoicing important: lumping materials in with labour means tax gets deducted from money that should never have been touched.
The deduction sits on top of the normal Self Assessment system rather than replacing it. Most subcontractors operate as self-employed sole traders, so CIS is best understood as an upfront instalment that gets reconciled later, the wider Construction Industry Scheme sets all the rules around it.
- Labour element
- The portion of a construction invoice that pays for the subcontractor's work, as opposed to materials, plant hire or VAT; only this element is subject to a CIS deduction.
The Deduction Rates
The rate a contractor applies depends entirely on the subcontractor's CIS status.
| Status | Deduction rate | Applies to |
|---|---|---|
| Registered | 20% | Subcontractors registered for CIS |
| Not registered | 30% | Subcontractors who have not registered |
| Gross payment status | 0% | Firms passing HMRC's turnover and compliance tests |
The 10-point jump from 20% to 30% is a deliberate penalty for not registering, so registering with HMRC is almost always worthwhile for cash flow. Gross payment status, where nothing is deducted and the subcontractor handles all their own tax, is reserved for established businesses that meet a minimum turnover threshold and have a clean compliance record.
A Worked Example for 2025/26
Take Dan, a registered self-employed electrician. A contractor pays him £5,000 for a job in 2025/26: £1,500 is materials he bought and £3,500 is labour.
| Step | Amount |
|---|---|
| Total invoice | £5,000 |
| Less materials (not deductible) | £1,500 |
| Labour subject to CIS | £3,500 |
| CIS deduction at 20% | £700 |
| Dan receives | £4,300 |
The £700 goes to HMRC and is credited to Dan. When he files his Self Assessment return, his real tax is calculated on his profit, after deducting his van, tools, insurance and other expenses, and his Personal Allowance. Because £700 was taken from gross labour with no account of any of that, his actual liability is usually lower, leaving him a tax rebate. The CIS calculator estimates both the deduction and the likely refund.
Why the Deduction Creates Refunds
The deduction is a blunt instrument. It takes 20% of labour with no regard for the fact that the first £12,570 of profit is covered by the Personal Allowance, or that a subcontractor with significant tool, travel and material costs has far less taxable profit than their gross labour suggests. Across a full year, the deductions frequently add up to more than the true bill. Filing the return is what unlocks the difference, which is why the annual Self Assessment matters even when it feels like the tax is "already paid". Leaving it unfiled simply leaves your own money sitting with HMRC.
A CIS deduction is taken from your labour before expenses and your Personal Allowance, so for many subcontractors the year-end return is less a bill than a refund waiting to be claimed.
Related terms
- CIS (Construction Industry Scheme): the full scheme that governs how deductions are made.
- Tax rebate: the refund subcontractors often receive after reconciling deductions.
- CIS calculator: estimate your deduction and likely refund.
People also ask
Frequently asked questions
- What is a CIS deduction?
- A CIS deduction is money a contractor takes off a subcontractor's labour payment under the Construction Industry Scheme and pays directly to HMRC. It is not an extra tax but an advance payment towards the subcontractor's eventual Income Tax and National Insurance. The standard rate is 20% for subcontractors registered for CIS and 30% for those who are not, applied only to the labour element of the invoice.
- What rate of CIS deduction will I have taken?
- If you are registered for CIS, the contractor deducts 20% from your labour payments. If you have not registered, the rate is 30%, effectively a penalty for not registering. Businesses granted gross payment status by HMRC have nothing deducted (0%) and settle all their tax through their own return. The deduction always applies to labour only, never to materials, plant hire or VAT.
- Do CIS deductions mean my tax is paid in full?
- Not usually. CIS deductions are advance payments, not a final tax bill. Because the 20% is taken from your labour before any expenses or your tax-free Personal Allowance, the deductions across a year often exceed what you actually owe once profit is worked out. You reconcile the deductions on your Self Assessment return, and the overpayment is repaid as a tax rebate.
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