If you work in construction, as a sole trader, subcontractor, or limited company,  chances are you’ve come across CIS deductions. They’re a core part of the Construction Industry Scheme (CIS), which sets out how contractors must handle payments to subcontractors for construction work.

However, CIS rules can be quite complicated to get to grips with, especially for those new to the industry. 

Why are deductions made? How much is taken? And what happens to that money? These are a few of the common questions we get at Crunch from our construction industry clients. 

So we’ve decided to explain exactly how CIS deductions work, what rates apply, and what your responsibilities are, whether you’re paying others or getting paid yourself. From deduction rates to reclaiming tax, this guide’s got everything you need to know to stay compliant and keep your business running smoothly.

What are CIS deductions?

CIS deductions are amounts taken off payments made to subcontractors under the Construction Industry Scheme (CIS). The deductions go directly to HMRC and count as advance payments towards the subcontractor’s tax and National Insurance.

Basically, it means that if you're a contractor paying a subcontractor for construction work, you may need to deduct a percentage from their invoice before you pay them, and pass that amount on to HMRC. This helps make sure that tax is paid on construction income in real time.

In practice it works likes this:

• A subcontractor sends you an invoice for work done
  
  
• You check their CIS status (this affects the deduction rate)
  
  
• You deduct the correct percentage and pay the balance
  
  
• You send the deducted amount to HMRC on their behalf
  
  

The scheme is designed to reduce tax evasion in the construction industry, but it can add an extra layer of admin for everyone involved. That’s why it’s so important to understand how CIS deductions work and to apply them correctly.

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CIS deduction rates explained

Under the Construction Industry Scheme, the amount you deduct from a subcontractor’s payment depends on their CIS verification status. There are three main deduction rates:

1. Standard rate – 20%

This is the most common rate. It applies to subcontractors who are registered with HMRC  for CIS but don’t have gross payment status.

2. Higher rate – 30%

This rate is used if the subcontractor isn’t registered for CIS or you can’t verify them with HMRC. It’s a penalty rate, so it’s in the subcontractor’s interest to get registered.

3. Gross payment status – 0%

If a subcontractor qualifies for gross payment status, no deductions are made. They receive full payment and are responsible for sorting their own tax and National Insurance through their tax return or company accounts.

Who is responsible for making CIS deductions?

Under the Construction Industry Scheme, it’s the contractor’s responsibility to make CIS deductions — not the subcontractor’s.

If you're a contractor, you must:

• Verify subcontractors with HMRC before paying them
  
  
• Deduct the correct CIS rate (20% or 30%) from labour costs
  
  
• Pay the deducted tax to HMRC by the deadline each month
  
  
• Submit a monthly CIS return showing who you paid and what you deducted
  
  
• Provide a payment and deduction statement to each subcontractor
  
  

If you're a subcontractor, your responsibilities include:

• Registering for CIS (to avoid the higher 30% rate)
  
  
• Keeping accurate records of all payments and deductions
  
  
• Claiming back overpaid tax, if eligible (we’ll cover how to do this later)
  
  

*Important to note: CIS deductions apply only to labour costs; not materials, VAT, or things like plant hire. Contractors must calculate deductions carefully and exclude non-labour elements from the total before applying the deduction rate.
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How CIS deductions are reported and paid to HMRC

Once you’ve made CIS deductions, you’re not finished, you also need to report them to HMRC and pay the amounts deducted on time. This is part of your duty as a contractor under the scheme.

Monthly CIS returns

Each month, you must submit a CIS return to HMRC showing:

• The subcontractors you’ve paid
  
  
• The amounts you paid them (excluding VAT)
  
  
• The amounts you deducted
  
  
• Any materials costs (which are not subject to deduction)
  
  

These returns are usually due by the 19th of the month following the payment date. For example, if you made payments in July, your return is due by 19 August.

Paying HMRC

You must pay the total deductions to HMRC by the same deadline. Late payments or missed returns can lead to penalties, so it’s important to keep up with your obligations.

Subcontractor statements

You also need to give each subcontractor a payment and deduction statement. This is usually done monthly and acts like a payslip, showing:

• Gross payment
  
  
• Materials (if applicable)
  
  
• CIS deduction
  
  
• Net payment received
  
  

These records help subcontractors track what tax has already been deducted, and make it easier for them to claim back overpaid tax later.
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Can you reclaim CIS deductions?

Yes, you can, if you're a subcontractor you can usually reclaim CIS deductions at the end of the tax year. These deductions are effectively advance payments towards your tax and National Insurance, so if you've paid too much, you may be due a refund.

For Sole Traders and partners

If you're self-employed (not operating through a Limited Company), you’ll claim back CIS deductions through your Self Assessment tax return. HMRC will offset the deductions against your tax bill,  and if you've overpaid, they'll issue a refund.

For Limited Companies

If you run a Limited Company and pay yourself through PAYE, you can reclaim CIS deductions your company has suffered by reporting them through your Employer Payment Summary (EPS) each month.

HMRC will offset the CIS deductions against your company’s PAYE and National Insurance liabilities. If your CIS deductions are more than your monthly payroll liabilities, you may build up a credit.

At the end of the tax year (or sooner, if eligible), your company can:

• Request the credit be repaid
  
  
• Ask HMRC to offset it against other liabilities such as Corporation Tax or VAT
  
  
• Carry it forward to a future PAYE period
  
  

For full details on how this works, you can refer to our 'How to claim a CIS deduction refund' guide.

Crunch Pro Tip: Keep clear records of all your CIS deduction statements and payments, HMRC may ask for these if there’s ever a dispute or delay with your refund.

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When does CIS not apply?

While CIS covers a wide range of construction work, it doesn’t apply to everything. Knowing when CIS deductions aren’t required can save you time, hassle, and potential errors.

CIS generally does not apply to:

• Work that isn’t construction-related, such as architecture, surveying, carpet fitting, or making construction materials off-site
  
  
• Employment contracts – CIS only covers self-employed subcontractors, not employees
  
  
• Private, non-construction clients – if you’re doing a one-off job for a homeowner (not a business), CIS won’t usually apply
  
  
• Pure materials-only invoices – if a subcontractor supplies only materials (with no labour), no CIS deduction should be made
  
  

Borderline cases:

Some jobs may include both CIS and non-CIS work - for example, installing security systems, scaffolding hire with or without labour, or design-and-build contracts. In these cases, only the labour portion that relates to construction may fall under CIS.

Crunch Pro Tip: When in doubt, it’s best to seek advice or refer to HMRC’s CIS guidelines, as incorrectly applying (or skipping) CIS can lead to fines.

For contractors making payments, or subcontractors trying to get paid, learning how CIS deductions work is essential for staying on the right side of HMRC,  and keeping your cash flow in check.

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Help with CIS deductions  

Getting to grips with the Construction Industry Scheme, by knowing which rates apply, what your reporting obligations are, and when deductions aren’t needed, can save you time, stress, and potential penalties.

If CIS still feels confusing, don’t be discouraged. Many construction businesses struggle with the admin and compliance side of things, and you don’t have to figure it all out yourself.

Get in touch with our team who can offer expert support and help you manage CIS deductions in a way that meets the unique needs of your business.

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