CIS Tax Deductions Explained: 20%, 30% and What's Actually Deducted

This is the first thing to get straight, because it changes how you should feel about the whole scheme.

A CIS deduction is an advance payment against your Income Tax and Class 4 National Insurance. It isn't an extra tax on construction. It isn't a fine. The contractor takes it off, sends it to HMRC, and it sits there with your name on it until you file. When you do your Self Assessment, you declare your gross income and your total CIS deducted, and HMRC works out the difference. If you've overpaid, and most subcontractors have, you get a refund.

The scheme exists because construction has a long history of cash work and disappearing subcontractors. Deducting at source was HMRC's answer. The legal machinery sits in the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005, with the practical guidance in HMRC's CIS340.

Takeaway: CIS money is your money. The only real question is how long HMRC holds it before you get it back.

The rates haven't moved for 2026/27, and they haven't moved for years.

The 30% rate is where people get needlessly hurt. It isn't a punishment and it isn't a different tax. It's the same money, going to the same place, reclaimed the same way. But an extra 10% off the top of every invoice is a serious cash flow problem when you're funding materials yourself. On £60,000 of labour a year, the gap between 20% and 30% is £6,000 of your working capital parked with HMRC until January.

Gross payment status is the one worth aiming at. You need construction turnover of at least £30,000 in the past 12 months excluding VAT and materials, a UK construction business, a business bank account, and a clean compliance record. Limited companies can qualify on £30,000 per director or £100,000 in total. The compliance test is where most applications fall over, and it's unforgiving: one late Self Assessment payment in the previous 12 months can sink it.

Takeaway: if you're sitting on 30%, registering is the highest-return hour of admin available to you.

Here's the rule that matters most. The deduction applies to the labour element of the payment. These are all excluded, as long as they're shown separately:

The words "shown separately" are doing enormous work in that sentence.

In practice, the single most common thing I see on subcontractor invoices is a bundled figure. One line: "Groundworks to rear extension, £3,500." A contractor's bookkeeper who's got forty of these to process on a Friday afternoon will run 20% off the lot, because nothing on the paperwork tells them not to. That's £700 gone instead of £480, and the £220 difference is your own materials money, sitting with HMRC for months. The bookkeeper hasn't done anything wrong. They've deducted CIS on everything because the invoice didn't tell them what was labour and what wasn't.

Nobody in an accounts department will chase you to itemise. It costs them nothing and it costs you real money.

Takeaway: split labour from materials on every invoice line, every time. It's a two-minute job that's worth hundreds.

Almost every CIS guide tells you materials are excluded and stops there. There's a second half to that rule, and it depends on your VAT position.

If you're VAT registered, you reclaim the VAT on your materials. That VAT never really cost you anything, so the materials figure you exclude from the CIS calculation is the net cost.

If you're not VAT registered, you can't reclaim it. The VAT you paid at the merchant counter is money that left your account and is never coming back. So the figure you exclude is the VAT-inclusive cost.

Get that backwards on a £960 materials bill and you've over-declared your CIS-able labour by £160, which costs you £32 on one invoice at the standard rate. Do it every week for a year and it's real money.

Takeaway: VAT registered, use the net materials cost. Not VAT registered, use the gross.

Marek runs a two-man groundworks gang in Nottingham. He's registered for CIS, verified at the standard rate, and VAT registered. He invoices a main contractor for footings on a rear extension:

Both businesses are VAT registered and the contractor isn't an end user, so the domestic reverse charge applies. Marek charges no VAT. The contractor accounts for the £700 themselves.

The amount subject to CIS is the labour only: £2,400. The materials and the plant hire are both excluded.

CIS deduction: £2,400 × 20% = £480. Net payment to Marek: £3,500 minus £480 = £3,020. The contractor pays HMRC £480 by the 22nd of the following month.

Run the same invoice with Marek unverified and the rate is 30%. The deduction becomes £720 and he takes home £2,780. Same work, same invoice, £240 less in the bank, purely because HMRC couldn't match his details.

Takeaway: the labour split moves more money than the rate does. Fix the invoice first.

The VAT domestic reverse charge for building and construction has applied since 1 March 2021, and it catches most CIS work between two VAT-registered businesses where the customer isn't an end user.

It doesn't change your CIS deduction at all, because CIS was always calculated on the payment excluding VAT. What it changes is your cash flow, and it's brutal for anyone who'd got used to living on their VAT float. You no longer collect VAT from the contractor, so that money never passes through your account. Plenty of small subcontractors quietly used that quarter's VAT as working capital. When the reverse charge landed, that cushion vanished overnight.

Takeaway: the reverse charge and CIS are separate deductions from the same invoice. Model both, not one.

The rates stayed put. The compliance rules didn't.

Nil returns are mandatory again. If you're a contractor and you paid no subcontractors in a tax month, you now file a nil CIS300 or pre-notify HMRC. This was scrapped in 2015 and came back in April 2026. If you're a contractor who's had quiet months and got out of the habit, you're now accruing penalties for doing nothing.

Gross payment status can be pulled without warning. Where HMRC decides a business knew, or should have known, that a transaction was connected to fraudulent tax evasion, it can now cancel gross payment status immediately with no advance notice, charge a penalty of up to 30% of the tax it considers lost, and bar reapplication for five years. The old wait was one year. The old process required notice.

Making Tax Digital for Income Tax started. From 6 April 2026, subcontractors with qualifying income over £50,000 in 2024/25 must keep digital records and file quarterly updates through approved software such as Xero, FreeAgent or QuickBooks. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028. There's a penalty grace period for late quarterly submissions, but only for the 2026/27 tax year.

Takeaway: if you hold gross payment status, your compliance record is now a business asset. Treat it like one.

Your MTD qualifying income is what you invoiced, not what landed in your account.

Invoice £55,000 over the year, have 20% CIS taken at source, and receive £44,000. Your qualifying income is still £55,000. You're in the April 2026 cohort. I've watched people look at their bank statements, see a number starting with a four, and conclude they've got another year or two. They haven't.

There's a related muddle worth clearing up, because a lot of pages have it wrong: MTD quarterly updates have not replaced the monthly CIS300. If you're a contractor, you still file a CIS300 by the 19th of every month, exactly as before. MTD ITSA governs how you report your own income. CIS governs what you deduct from other people. They're separate obligations doing entirely different jobs, and mixing them up is how contractors end up with late filing penalties they never saw coming.

Takeaway: check your gross invoiced total against the £50,000 line, not your bank balance.

Your contractor must give you a payment and deduction statement within 14 days of the end of each tax month. Keep every one. No statement means no reliable proof, and mismatched figures mean a delayed refund.

Sole traders reclaim through Self Assessment. Limited companies offset CIS suffered against PAYE and National Insurance through the Employer Payment Summary each month, with any surplus carried forward and reconciled at year end.

The most useful habit in this entire article: file your Self Assessment in April, not January. The return opens on 6 April and there's no prize for waiting. If HMRC owes you £4,000, every month you delay is a month you've lent it to them for free.

Takeaway: file early. It's the cheapest cash flow improvement available to a subcontractor.