Construction contractors have two main options for how they get paid: CIS self-employment or umbrella PAYE. They handle tax differently. They give you different rights. The admin is different. And the take-home can be very different depending on your situation. This guide compares the two so you can make the right call.
What is CIS?
CIS stands for Construction Industry Scheme. It is an HMRC tax system for construction. The main contractor takes money from each subcontractor payment and sends it to HMRC. Subcontractors get paid with the deduction already taken out. They file a self-assessment each year to settle the difference.
Under CIS, you are self-employed. You handle your own tax. You file a self-assessment tax return every year. You can claim expenses: materials, tools, travel to different sites. You do not have an employer.
The deduction rate depends on your registration. It is 20% if registered with HMRC. It is 30% if unregistered. It is 0% if you hold Gross Payment Status (GPS). These deductions are not final tax. They are advance payments. Your actual tax is worked out at year end through self-assessment.
See the full detail on the Construction Industry Scheme for how it works.
What is an umbrella company for construction?
An umbrella company employs you under PAYE. You are an employee. Income tax and NIC come out every time you get paid. You get employment rights. The umbrella handles all payroll. You do not file self-assessment unless you have other income.
Under umbrella PAYE, you are employed, typically 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. Employer NIC (15% from April 2025), umbrella margin, income tax, and employee NIC all come out before you get paid. But you get employment rights that CIS self-employment does not give you.
How does tax work under CIS vs. umbrella?
Under CIS, you pay tax once per year through self-assessment. Under umbrella PAYE, tax comes out every pay period. Both routes pay the same basic tax. The difference is timing, admin, and what you can claim.
CIS:
- 20% deducted at source each payment
- You file self-assessment by 31 January each year
- You claim business expenses: materials, tools, site travel, protective gear
- If your deductions are more than your final tax bill, you get a refund
- Higher earners pay extra tax through self-assessment
Umbrella PAYE:
- Income tax and NIC come out monthly or weekly through the umbrella
- Usually no self-assessment needed (unless you have other income)
- Limited expense deductions: the SDC test blocks travel and subsistence for most umbrella workers
- The umbrella manages your tax
The key difference: CIS lets you claim more expenses, which brings down your taxable income. Umbrella PAYE takes those claims away but removes the self-assessment burden.
How do employment rights compare?
CIS subcontractors are self-employed. They get none of the statutory employment rights that employees have. Umbrella PAYE contractors are employed. They get holiday pay, sick pay, auto-enrolment pension, and protections under UK employment law.
CIS: no entitlement to:
- Paid annual leave (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: entitled to all of these as 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, read what umbrella contractors are entitled to for the full list. This matters for mortgage applications, loan assessments, or simple peace of mind.
How does take-home pay compare?
CIS take-home is usually higher than umbrella PAYE for contractors who claim expenses actively. CIS self-employment allows tax relief on materials, tools, and genuine work travel. None of these are available under umbrella PAYE for most contractors.
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 (0% deduction vs. 20%)
- Whether umbrella employer NIC and margins are reasonable
Use the umbrella company calculator to model what umbrella PAYE would produce for your day rate or weekly rate. Then compare it to your current CIS position.
Who suits CIS better?
CIS suits contractors who are genuinely self-employed. It suits those who work for multiple clients. It suits those with real business expenses to claim: materials, tools, site travel. And it suits those who are comfortable managing self-assessment. GPS holders benefit significantly.
Typical CIS profile:
- Sole trader or director of a small construction company
- Works for several contractors per year, not one continuous engagement
- Has genuine material and tool costs to claim
- GPS status or working toward it
- Comfortable with self-assessment and annual tax returns
Who suits umbrella better?
Umbrella PAYE suits construction contractors on a single continuing assignment. It also suits those who do not have significant expenses to claim. It suits contractors who want PAYE employment rights, especially holiday pay and pension. And it suits those 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, choose 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. You 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. Then you start filing self-assessment.
Speak to a tax adviser before switching if you have a complex tax position. For example, if you have been taking both employed and self-employed income in the same year.
Contact the CIS payroll service to discuss how DASA handles payroll for construction contractors under both arrangements.
Frequently Asked Questions
What is the main difference between CIS and umbrella company for construction contractors?
CIS means you are self-employed. You pay tax through self-assessment. You can claim more business expenses. But you get no employment rights. Umbrella means you are employed under PAYE. Employment rights apply. Admin is simpler. But expense claims are limited.
Is take-home pay higher under CIS or umbrella?
CIS usually gives higher take-home for contractors with real expenses to claim (materials, tools, site travel). Umbrella PAYE take-home is lower because the SDC test blocks most expense claims. GPS holders under CIS get the best outcome.
Do umbrella construction contractors get holiday pay and sick pay?
Yes. Umbrella contractors are employed workers. They get 5.6 weeks’ paid holiday per year. They get Statutory Sick Pay from day four of illness. CIS subcontractors are self-employed. They get neither.
Can I switch from CIS to umbrella or back again?
Yes. You can switch at any time. Moving to umbrella means joining PAYE and stopping self-assessment. Moving to CIS means registering with HMRC as a CIS subcontractor and starting self-assessment. Get tax advice if you switch mid-year.
Do some agencies require umbrella PAYE for construction contractors?
Yes. Some agencies and end-clients require PAYE engagement for all workers. This applies regardless of what the contractor prefers. If umbrella is required, choose one with FCSA and Professional Passport accreditation.
