Under CIS, contractors take tax from subcontractor payments before sending them to HMRC. The rate depends on the subcontractor’s status. It is not the final tax bill. It is an advance payment, and the self-assessment return at year end settles the balance.
What are the three CIS deduction rates?
HMRC sets three CIS rates:
- 20%: registered rate. This applies to subcontractors registered with HMRC under CIS.
- 30%: unregistered rate. This applies to subcontractors who are not registered with HMRC.
- 0%: Gross Payment Status (GPS). This applies to subcontractors who have passed HMRC’s GPS compliance tests.
The contractor checks the subcontractor’s status by verifying it with HMRC before the first payment. HMRC confirms the rate. The contractor then uses that rate for all payments until HMRC says otherwise.
See the full guide on CIS gross payment status to see how GPS is approved and maintained.
What does the deduction apply to?
CIS deductions apply only to the labour part of a subcontractor’s payment. Materials are excluded from the calculation.
That matters when an invoice covers both labour and materials. Only the labour part attracts the deduction.
Example: invoice total £6,000. £4,000 labour. £2,000 materials.
- CIS deduction (20%): 20% × £4,000 = £800
- Amount passed to HMRC: £800
- Amount paid to subcontractor: £5,200
The subcontractor should keep receipts to show the materials cost. Contractors should keep a record of the split in case HMRC asks for it.
You can calculate CIS deductions 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 confirms the status when the contractor verifies the subcontractor before the first payment. Most active CIS subcontractors are registered. To register, subcontractors apply through HMRC Government Gateway and need a Unique Taxpayer Reference (UTR). Once HMRC accepts the verification, the contractor uses the 20% rate. The deduction is an advance payment. At year end, the self-assessment return works out the actual tax bill. If deductions are more than the bill, the subcontractor gets a refund. If the bill is higher, they pay the difference.
What is the 30% unregistered rate?
The 30% rate applies when a subcontractor is not registered with HMRC. HMRC uses it as a penalty rate to encourage registration. An unregistered subcontractor pays 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, if the name, UTR, or NI number does not match HMRC’s records. From 6 April 2026, HMRC increased scrutiny of verification checks. If a contractor pays at the wrong rate, even by mistake, they are responsible for the shortfall. Verify before paying. Do not assume a subcontractor is registered. Always run the check through HMRC and keep the reference number.
What is the 0% GPS rate?
GPS holders are paid in full. The contractor pays the invoice minus VAT, with no CIS deduction for HMRC. The subcontractor handles tax through self-assessment. GPS is available to subcontractors who meet HMRC’s compliance and turnover tests. It also helps cash flow, because they keep the full invoice amount until the self-assessment bill falls due. The full requirements are covered in CIS gross payment status.
How are deductions counted against annual tax?
CIS deductions count against a subcontractor’s annual tax and NIC bill. On the self-assessment return, they appear as “CIS deductions suffered.” HMRC checks them against the monthly returns submitted by the contractors who paid you. For sole traders and partnerships, the deductions go against income tax and Class 4 NIC. If you have paid more than you owe, HMRC refunds the difference. For limited companies, the deductions go against corporation tax. 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 using the correct rate. If they underpay HMRC because they used the wrong rate, they must make up the shortfall. If a subcontractor thinks the wrong rate was used, they should raise it with the contractor straight away and contact HMRC if needed.
Common errors include:
- The contractor applies 20% to a subcontractor who has not been verified, when 30% should apply.
- The contractor pays at 0% without confirming GPS status.
- The materials split is wrong, which reduces the amount that should have been deducted.
If a contractor finds an error, they should contact HMRC directly instead of quietly changing later 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, so the umbrella 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: the payroll is simpler, there is no self-assessment, and there is no rate to track.
For background on what CIS covers, both CIS and umbrella options are available through DASA.
DASA’s CIS payroll for contractors handles deduction calculations and rate verification.
FAQs
What are the three CIS deduction rates?
There are three CIS deduction rates: 20% for registered subcontractors, 30% for subcontractors who aren’t registered, and 0% for subcontractors with Gross Payment Status. HMRC confirms the rate 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 are left out of the calculation. Contractors need to keep evidence of the materials split, such as receipts.
Why is the unregistered CIS rate 30%?
The 30% rate is the higher rate meant to encourage registration. It applies when a subcontractor hasn’t registered with HMRC or when HMRC can’t verify their details. Once they register, the rate drops to the standard 20%.
How do CIS deductions count toward the annual tax bill?
CIS deductions show on Self Assessment returns as “CIS deductions suffered.” HMRC cross-checks them against monthly returns. If the deductions are more than the tax you owe for the year, HMRC refunds the difference.
What happens if the wrong CIS deduction rate is applied?
The contractor is responsible for any shortfall. If the wrong rate is used, even by accident at a lower rate, the contractor has to make up the difference to HMRC. Always check the subcontractor’s status before paying.
