What are CIS deductions?
Construction industry scheme (CIS) deductions are tax payments that contractors take off a subcontractors pay before they’re paid. The deducted amount is sent to HMRC and count as advance payment towards the subcontractor’s tax and national insurance, instead of being paid letter through self-assessment.
CIS is not payroll. It is a separate HMRC scheme with its own verification, reporting and reconciliation process, and it must be recorded correctly in your bookkeeping.
How do CIS deductions work in practice?
Contractors deduct either 20% or 30% from a subcontractor’s labour only payments. In some cases, no deductions are made if the subcontractor has Gross Payment Status. They must verify the subcontractor, make the deduction, and pay it to HMRC each month. The amount deducted is then used by the subcontractor to reduce their final tax bill.
0%, 20% & 30% CIS deductions: what’s the difference?
0% rate (Gross Payment Status)
Some subcontractors are approved by HMRC for Gross Payment Status. This means no CIS deductions are taken from their payments, provided they meet HMRC’s 3 qualifying tests (turnover, compliance and business). Contractors must still verify them and include them on the monthly CIS return.
20% rate
This applies to subcontractors who are registered and verified for CIS. It is the standard deduction rate and means less tax is taken from each payment. To qualify, the subcontractor must be registered to the construction industry scheme, verified by the contractor and provide valid tax details.
30% rate
This applies when a subcontractor is not registered for CIS or cannot be verified by the contractor. It is a higher deduction rate and reduces the amount the subcontractor is paid. This rate is used when HMRC cannot confirm the subcontractor’s CIS status.
How to calculate CIS deductions correctly?
- Determine Gross Payment: start with the total invoice amount, excluding VAT.
- Deduct Materials & VAT: subtract the cost of materials and any VAT to get the labour amount that CIS applies to.
- Check the subcontractor’s registration status: Confirm whether they are registered, unregistered or paid under gross payment status. This determines the deduction rate: 20%, 30% or 0%.
- Calculate the Deduction: apply the rate to labour amount using this formular:
(Invoice total – Materials – VAT) x Deduction Rate
- Make the payments: pay the net amount to the subcontractor and send the deducted amount to HMRC.
Common CIS deduction mistakes contractors and payroll teams make
Most common CIS deduction mistakes made by contractors and payroll teams, based on HMRC regulations:
- Not verifying subcontractors before payment
- Incorrectly calculating deductions
- Missing monthly CIS reporting deadlines
- Using the wrong deduction rate (0%, 20%, 30%)
- Poor record keeping & admin
- Misclassifying employment status
- Getting contractor status wrong
- Applying VAT incorrectly
How to check and reconcile CIS deductions properly
Checking and reconciling CIS deductions should be part of a monthly process. This means matching payments to invoices and confirming they agree with HMRC record, so tax is not overpaid. Subcontractors need to reconcile their deductions to make sure they can reclaim any tax they’ve overpaid. Contractors must do the same to ensure their figures are accurate and to avoid HMRC penalties.
This reconciliation is done through CIS300 monthly return, which reports all subcontractor payments and deductions to HMRC. This CIS300 must be submitted every month, even if no payments were made.
Managing CIS manually is time consuming and easy to get wrong. Kintec CIS payroll software removes the guesswork by automatically applying the correct rates, calculating CIS on labour only, and preparing accurate monthly submissions to HMRC. With built in verification, reporting, and reconciliation, Kintec helps you stay compliant, avoid costly mistakes and spend less time on admin, and more time running your business.
