Construction contractors usually end up choosing between two pay setups: CIS self-employment or umbrella PAYE. They work differently for tax, employment rights, admin, and take-home pay. Depending on your situation, the gap can be meaningful. This guide breaks down both options so you can decide what fits best.
What is CIS?
CIS stands for Construction Industry Scheme. It is HMRC’s tax system for construction. Contractors deduct money from subcontractor payments and send it to HMRC. Subcontractors are paid after the deduction is taken. They then file self-assessment each year to settle up.
Under CIS, you are self-employed, so you are responsible for your own tax. You file a self-assessment tax return every year. You can also claim allowable expenses, including materials, tools, and travel between different sites. You do not have an employer under CIS.
The deduction rate depends on your registration status: 20% if you are registered with HMRC, 30% if you are unregistered, and 0% if you hold Gross Payment Status (GPS). Those deductions are not your final tax bill. They are advance payments, and your actual tax is worked out at the end of the tax year through self-assessment.
See the full detail on how CIS works.
What is an umbrella company for construction?
An umbrella company employs you under PAYE. That means you are an employee, income tax and NIC are taken each time you are paid, and the umbrella handles all payroll. You get employment rights, and you usually do not need self-assessment unless you have additional income.
Under umbrella PAYE, you are employed, usually by the umbrella company under a contract of employment. The agency places you with the end-client, the end-client pays the agency, the agency pays the umbrella, and the umbrella pays you.
Your take-home is lower than your billed day rate because employer NIC (15% from April 2025), the umbrella margin, income tax, and employee NIC are all deducted. In return, you get employment rights that CIS self-employment does not provide.
How does tax work under CIS vs. umbrella?
Under CIS, you pay tax once a year through self-assessment. Under umbrella PAYE, tax is deducted every pay period. Both routes pay the same basic tax. The difference is in timing, admin, and what you can claim.
CIS:
– 20% deducted at source from each payment
– You file self-assessment by 31 January each year
– You can claim business expenses, including materials, tools, site travel, and protective gear
– If your deductions are higher than your final tax bill, you get a refund
– Higher earners pay additional tax through self-assessment
Umbrella PAYE:
– Income tax and NIC are deducted weekly or monthly by the umbrella
– You usually do not need self-assessment unless you have other income
– Expense deductions are limited, because the SDC test blocks travel and subsistence for most umbrella workers
– Tax is handled for you
The key difference is simple: CIS lets you claim more expenses, which can reduce your taxable income. Umbrella PAYE removes those claims, but it also removes the self-assessment burden.
How do employment rights compare?
CIS subcontractors are self-employed, so they do not get the statutory employment rights that employees do. Umbrella PAYE contractors are employed, so they get holiday pay, sick pay, auto-enrolment pension, and protection under UK employment law.
CIS contractors do not get:
– Paid annual leave, which is 5.6 weeks for employees
– Statutory Sick Pay (SSP)
– Auto-enrolment pension contributions from an employer
– Minimum wage protections as an employee
– Redundancy pay or unfair dismissal protection
Umbrella PAYE contractors are entitled to all of these at a minimum:
– 5.6 weeks’ paid holiday per year
– Statutory Sick Pay from day four of illness
– Auto-enrolment pension with employer contributions
– NLW floor (£12.71/hour from April 2026)
If continuity of employment rights matters to you, for mortgage applications, loan assessments, or just peace of mind, read what umbrella contractors are entitled to for the full list.
How does take-home pay compare?
CIS take-home is usually higher than umbrella PAYE for contractors who actively claim expenses. That is because CIS self-employment allows tax relief on materials, tools, and genuine work travel, and most of those claims are not available under umbrella PAYE.
This is not a fixed rule. It depends on:
– How many deductible expenses you have
– Whether you are at basic or higher rate tax
– Whether you hold GPS, which means 0% deduction instead of 20%
– Whether umbrella employer NIC and margins are reasonable
Use the umbrella company calculator to model what umbrella PAYE would give you for your day rate or weekly rate. Then compare that figure with your current CIS position.
Who suits CIS better?
CIS suits contractors who are genuinely self-employed, work for multiple clients, have real business expenses to claim, and are comfortable managing self-assessment. GPS holders usually benefit the most.
Typical CIS profile:
– Sole trader or director of a small construction company
– Works for several contractors each year, not one continuous engagement
– Has genuine material and tool costs to claim
– Has GPS status or is working toward it
– Is comfortable with self-assessment and annual tax returns
Who suits umbrella better?
Umbrella PAYE suits construction contractors who are on a single ongoing assignment, do not have significant expenses to claim, want PAYE employment rights, especially holiday pay and pension, or whose agency or end-client requires PAYE engagement.
Typical umbrella profile:
– Labour-only subcontractor on a long-running site
– Placed by an agency that requires PAYE engagement
– Values holiday pay and pension contributions
– Does not want to manage self-assessment
Some agencies and end-clients now require umbrella PAYE for all workers, regardless of the contractor’s preference. If your agency insists on umbrella, it is worth choosing a PAYE umbrella company that is FCSA and Professional Passport accredited.
Can you switch between CIS and umbrella?
Yes. The two arrangements are not permanent. If you move from CIS to umbrella, you join the umbrella’s PAYE scheme and stop filing as self-employed, as long as umbrella is your only income. If you move from umbrella to CIS, you register with HMRC as a CIS subcontractor and start filing self-assessment.
Speak to a tax adviser before switching if you have a complex tax position, for example if you have taken both employed and self-employed income in the same year.
