Under CIS, contractors deduct money from subcontractor payments before passing it to HMRC. The rate depends on the subcontractor’s status. It is not the final tax bill. It is an advance payment, and the year-end self-assessment return settles the difference.
What are the three CIS deduction rates?
- 20% rate for registered subcontractors. This applies to subcontractors registered with HMRC under CIS.
- 30% rate for unregistered subcontractors. This applies to subcontractors who are not registered with HMRC.
- 0% rate for Gross Payment Status (GPS) holders. This applies to subcontractors who have passed HMRC’s GPS compliance tests.
Before the first payment, the contractor verifies the subcontractor with HMRC. HMRC confirms the rate. The contractor keeps using that rate until HMRC says otherwise.
Read the CIS gross payment status guide to see how GPS is approved and maintained.
What does the deduction apply to?
CIS deductions apply to the labour part of a subcontractor’s payment only, not the materials. If an invoice includes materials costs, HMRC leaves that part out of the deduction calculation.
That matters in practice. A subcontractor can invoice for labour and materials on the same job, but only the labour amount is deducted.
Example: invoice total £6,000. £4,000 labour. £2,000 materials.
CIS deduction at 20%: 20% of £4,000 = £800
Amount sent to HMRC: £800
Amount paid to subcontractor: £5,200
The subcontractor should keep receipts to support the materials cost. Contractors should also keep records in case HMRC asks how the split was worked out.
Use the CIS deduction calculator to check the deduction and net payment for any invoice.
What is the 20% registered rate?
The 20% rate is the standard rate for CIS-registered subcontractors. HMRC checks registration when the contractor verifies the subcontractor’s details before the first payment. Most active CIS subcontractors are registered.
To register under CIS, subcontractors apply through HMRC Government Gateway. They need a Unique Taxpayer Reference (UTR). Once registered, HMRC confirms the 20% rate to any contractor who verifies them.
The 20% deduction is an advance payment. At year end, the subcontractor’s self-assessment return calculates the actual tax bill. If deductions are higher than the bill, HMRC refunds the difference. If the bill is higher, the subcontractor pays the balance.
What is the 30% unregistered rate?
The 30% rate applies when a subcontractor has not registered with HMRC. It is a penalty rate meant to push people to register. An unregistered subcontractor pays more tax during the year than a registered one on the same earnings.
The 30% rate also applies if HMRC’s verification system cannot confirm a subcontractor’s details, for example when the name, UTR, or NI number does not match HMRC’s records.
Since 6 April 2026, HMRC has been stricter about verification. If a contractor pays at the wrong rate, even by mistake, the contractor is responsible for the shortfall.
The safe process is simple. Verify before paying. Do not assume a subcontractor is registered. Always run the check through HMRC’s system and keep the reference number.
What is the 0% GPS rate?
GPS holders are paid in full, with no deduction. The contractor pays the invoice minus VAT, and nothing is taken for HMRC. The GPS subcontractor handles all tax through self-assessment.
HMRC only grants GPS to subcontractors who meet the compliance and turnover tests. The benefit is simple: the subcontractor keeps the full payment until the self-assessment bill is due.
The full requirements are covered in the CIS gross payment status guide.
How are deductions counted against annual tax?
CIS deductions count against a subcontractor’s annual tax and NIC liability. They appear on the self-assessment return as “CIS deductions suffered.” HMRC cross-checks them against the monthly returns filed by the contractors who paid you.
For sole traders and partnerships, CIS deductions go against income tax and Class 4 NIC. If the deductions are higher than the tax due, HMRC refunds the difference.
For limited companies, CIS deductions go against corporation tax. Companies offset CIS deductions suffered against the corporation tax bill. If the deductions are higher than the bill, HMRC refunds the balance.
What if the deduction rate was applied incorrectly?
The contractor is responsible for deducting at the correct rate. If they underpay HMRC because they used the wrong rate, they must make up the shortfall. Subcontractors who think they were deducted at the wrong rate should raise it with the contractor straight away and contact HMRC if needed.
Common errors:
- Contractor applies the 20% rate to a subcontractor who has not been verified. The correct rate should be 30%.
- Contractor pays at 0% without confirming GPS status.
- The materials split is worked out incorrectly, which reduces the deduction too much.
Contractors who find a rate error should contact HMRC directly instead of quietly changing future payments.
What about umbrella company construction workers?
Subcontractors who work through an umbrella company are not subject to CIS deductions. They are employed under PAYE. The umbrella company handles income tax and NIC directly. CIS deduction rates only apply to self-employed CIS subcontractors.
That is one reason some construction workers prefer umbrella PAYE. It gives them simpler payroll, no self-assessment, and no deduction rate to keep track of.
For background on what CIS covers, both CIS and umbrella options are available through DASA.
