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.
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 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.
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.
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.
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.
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