CIS for builders: the 20 percent deduction explained

You finished the job. You sent the invoice. The money lands in your account and it is 20 percent lighter than you expected.

That is CIS. The Construction Industry Scheme. Here is what it is, why it happens, and how to make sure you are on the right rate.

What CIS is

CIS is an HMRC scheme for construction work. When a contractor pays a subcontractor, the contractor must deduct tax in advance and send it straight to HMRC.

It is not a penalty. It is tax collected early. The deduction counts as an advance payment toward your tax and National Insurance for the year.

The scheme only covers construction. It applies to builders, plumbers, electricians, carpenters, decorators, and anyone supplying labour for construction work in the UK.

The three deduction rates

How much gets deducted depends on your status with HMRC.

20 percent: registered and verified. You registered for CIS and gave your contractor your exact Unique Taxpayer Reference and trading name. Your contractor verified you with HMRC. You get the standard rate.

30 percent: not registered or not verified. You never registered, or your details do not match HMRCs records. The contractor must deduct the higher rate. Simply registering is the fastest way to drop from 30 to 20.

0 percent: gross payment status. You are paid in full with no deductions. You then pay all your own tax at the end of the year. This needs a separate application and strict qualifying tests. More on that below.

A worked example

Say you invoice for a job like this.

1. Labour: £1,000
2. Materials you paid for: £200

The 20 percent deduction applies to the labour only. That is £200.

The contractor pays you £1,000 in full. £200 is sent to HMRC. Your account receives £1,000.

If you were unregistered, the deduction would be £300 instead. That one missing registration costs you £100 on this invoice alone.

What the deduction does not touch

CIS deductions are taken from the labour element only. Your contractor must not deduct from:

1. VAT on the invoice
2. Materials you paid for directly
3. Plant hired for the job
4. Consumable equipment that is now unusable

Your contractor can ask for proof of what you spent on materials, like receipts. If you have no proof, they can estimate the cost themselves. So keep every receipt.

This is why it pays to show labour and materials as separate lines on every invoice. Mixed into one line, you risk paying deduction on the whole amount.

The deduction is not your final tax bill

This confuses a lot of builders. The 20 percent taken from your payment is an advance payment, not your final tax.

At the end of the tax year you declare all your CIS income on your Self Assessment tax return. HMRC compares what was deducted against what you actually owe.

If too much was taken, you get a refund. Many subcontractors with high expenses get money back every year, because the deduction was based on gross labour before expenses.

If too little was taken, you pay the balance.

How to get the 20 percent rate, not 30

Do these three things before you start with a new contractor.

1. Register for CIS with HMRC. You can register online as a sole trader, a partnership, or a limited company. You can also apply if you are based abroad but doing construction work in the UK.

2. Give the contractor your exact details. Hand over your Unique Taxpayer Reference and your legal or trading name exactly as they appear on your registration. A small typo can mean you fail verification and get hit with 30 percent.

3. Invoice labour and materials separately. Clear lines protect your materials from deductions and make your year end far easier.

Should you go for gross payment status

Gross payment status means no deductions at all. You are paid in full and settle your whole tax bill yourself at the end of the year. It is excellent for cash flow.

To qualify you must pass three HMRC tests.

1. The business test. You do construction work in the UK and run the business through a UK bank account.

2. The turnover test. Your net construction turnover over the last 12 months must be at least £30,000 as a sole trader. That is labour only, excluding VAT and materials. Partnerships and companies have higher thresholds.

3. The compliance test. Your tax record for the last 12 months must be clean. Returns filed on time. Payments made on time.

One warning. Gross status removes the safety net. With 20 percent deducted, part of your tax is already paid as you go. With gross status, nothing is paid until year end. If you are not disciplined about setting money aside, the bill can land hard.

Quick answers

Do I have to register for CIS? No, it is not compulsory. But if you work as a construction subcontractor and do not register, you pay 30 percent on every payment instead of 20. Registration is free.

What if my contractor never gave me a deduction statement? Contractors must give you a payment and deduction statement for each payment. Keep every statement. You need them for your tax return and for any refund claim.

Can I get my CIS deductions back? Only if too much was deducted for the year. The refund is calculated on your Self Assessment return, or through company payroll if you trade as a limited company. It is not automatic. You must file the return.

Does CIS affect my VAT reverse charge? They are separate rules that often apply to the same invoice. CIS controls the tax deducted from your payment. The VAT reverse charge controls how VAT is handled between VAT registered construction businesses. You can be subject to both at once.

How PlusWise helps

PlusWise keeps your invoices, your deduction statements, and your expenses in one digital place. That matters for CIS because your refund depends on clean records.

You can log each payment with the deduction taken, track materials separately from labour on every invoice, and see your real position per job. When your tax return comes round, everything is already in one place instead of a drawer of paper statements.

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Sources checked October 2026: GOV.UK guidance on what CIS subcontractors must do, including deduction rates and gross payment status tests; HMRC Construction Industry Scheme guidance.