Under CIS, contractors take money from subcontractor payments. They send it to HMRC. The amount depends on which of three deduction rates applies. This is not your final tax. It is an advance payment. Your self-assessment return at year end sorts out the difference.
What are the three CIS deduction rates?
HMRC sets three rates for CIS deductions:
- 20% — registered rate. For subcontractors registered with HMRC under CIS.
- 30% — unregistered rate. For subcontractors not registered with HMRC at all.
- 0% — Gross Payment Status (GPS). For subcontractors that passed HMRC’s GPS compliance tests.
The contractor checks the subcontractor’s status before the first payment. They run a verification through HMRC. HMRC confirms the rate. The contractor uses that rate for all payments until HMRC says otherwise.
See the full guide on CIS gross payment status. It explains how HMRC approves and maintains GPS.
What does the deduction apply to?
CIS deductions apply to the labour part of a subcontractor’s payment only. They do not apply to materials. If a subcontractor’s invoice includes materials costs, you leave those out of the deduction calculation.
A subcontractor may provide labour and materials. They invoice for both. Only the labour part gets the CIS deduction.
Example: invoice total £6,000. £4,000 labour, £2,000 materials.
- CIS deduction (20%): 20% × £4,000 = £800
- Amount sent to HMRC: £800
- Amount paid to subcontractor: £5,200
The subcontractor must show the materials cost with receipts. Contractors should keep records of materials deductions. HMRC may ask about the split.
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 first payment. Most active CIS subcontractors are registered.
To register under CIS, subcontractors apply through HMRC Government Gateway. Registration needs a Unique Taxpayer Reference (UTR). After registration, HMRC tells any contractor that the 20% rate applies.
The 20% deduction is an advance payment. At year end, the subcontractor’s self-assessment return works out their actual tax. If deductions are more than the tax they owe, they get a refund. If the tax they owe is more than the deductions, they pay the difference.
What is the 30% unregistered rate?
The 30% rate applies when a subcontractor has not registered with HMRC. This is a penalty rate. It pushes people to register. An unregistered subcontractor pays a lot more tax through 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, the name, UTR, or NI number may not match their records.
From 6 April 2026, HMRC increased checks on the verification process. Contractors must pay at the correct rate. If they pay at the wrong rate, they must cover the shortfall. This includes paying a lower rate by mistake.
The correct process: verify before paying. Do not assume any subcontractor is registered. Always run a verification through HMRC’s system. Get a reference number.
What is the 0% GPS rate?
GPS holders get paid in full. No deduction. The contractor pays the invoice minus VAT. Nothing goes to HMRC. The GPS subcontractor handles all their own tax through self-assessment.
GPS is HMRC’s reward for subcontractors with clean compliance and enough turnover. It is a big cash flow advantage. The subcontractor holds the full invoice payment until their self-assessment bill is due.
The full requirements are in the CIS gross payment status guide.
How do deductions count against annual tax?
CIS deductions count as credit against a subcontractor’s annual tax and NIC bill. They show on the self-assessment return as “CIS deductions suffered.” HMRC crosschecks these against the monthly returns from the contractors that paid you.
For sole traders and partnerships: CIS deductions go against income tax and Class 4 NIC. If you paid more in CIS deductions than you owe, HMRC refunds the difference.
For limited companies: CIS deductions go against corporation tax. Companies offset CIS deductions suffered against their corporation tax bill. If deductions are more than the bill, HMRC refunds the balance.
What if someone applied the deduction rate incorrectly?
The contractor must deduct at the correct rate. If they underpay HMRC because of a wrong rate, they must make up the shortfall. Subcontractors should check their rate. If you think the contractor used the wrong rate, tell them right away. Contact HMRC if you need to.
Common errors:
- Contractor uses the 20% rate for a non-verified subcontractor (should be 30%)
- Contractor pays at 0% without confirming GPS status
- Materials split is wrong, so the deductible amount is too low
Contractors that find a rate error should contact HMRC directly. Do not quietly adjust future payments.
What about umbrella company construction workers?
Subcontractors under an umbrella company do not pay CIS deductions. They work under PAYE. The umbrella handles income tax and NIC directly. CIS deduction rates only apply to self-employed CIS subcontractors.
Some construction workers prefer umbrella PAYE for this reason. Simpler payroll. No self-assessment. No deduction rate to track.
For the Construction Industry Scheme and CIS payroll, DASA offers both CIS and umbrella options.
Contact the CIS payroll service for help with CIS deduction calculations or rate verification.
Frequently Asked Questions
What are the three CIS deduction rates?
20% for registered subcontractors, 30% for unregistered subcontractors, and 0% for subcontractors with Gross Payment Status. The rate is confirmed by HMRC when the contractor verifies the subcontractor before payment.
Do CIS deductions apply to materials costs?
No. CIS deductions apply to the labour element only. Materials costs are excluded from the calculation. Contractors must be able to document the materials split with receipts.
Why is the unregistered CIS rate 30%?
The 30% rate is a penalty rate to encourage registration. It applies when a subcontractor has not registered with HMRC or when HMRC cannot verify their details. Registering reduces the rate to the standard 20%.
How do CIS deductions count toward the annual tax bill?
CIS deductions appear on self-assessment returns as “CIS deductions suffered.” HMRC crosschecks these against monthly returns. If deductions exceed the annual tax liability, the difference is refunded.
What happens if the wrong CIS deduction rate is applied?
The contractor is responsible for the shortfall. Paying at the wrong rate means the contractor must make up the difference to HMRC. This includes paying a lower rate by mistake. Always verify the subcontractor’s status before paying.
