How does CIS tax work?

CIS tax (Construction Industry Scheme) is a deduction-based scheme set up by HMRC to collect income tax throughout the year from those who carry out construction work.

Here’s how it all works…

Contractors deduct CIS tax on behalf of their workers (subcontractors) and send the money directly to HMRC as tax payments. 

Whilst it is mandatory for contractors to register for CIS, this is a choice for subcontractors. They don’t have to but whether you’re registered for CIS or not determines the amount of tax you pay: 

• Registered subcontractors: 20% CIS tax deduction
• Unregistered subcontractors: 30% CIS tax deduction

That extra 10% can make a big difference! If you want to avoid overpaying, it’s worth registering.

An example of how CIS tax works:

Louie is a contractor. He hires John to carry out some construction work. John is a subcontractor. Every month John is owed a gross payment of £1,500 pounds for his work (gross payment is simply how much you make before taxes and other deductions).

As a CIS rule, contractors are required to ‘withhold’ taxes and pay subcontractors their net pay (earnings after tax is deducted). 

So Louie deducts £300 each month from John’s wages and pays him £1200. The deducted £300 is sent to HMRC. This will count as an ‘advance payment’ towards John’s income tax and national insurance contributions.

Louie also provides John with a CIS statement as proof of tax deductions. In the construction world, this is basically a payslip.

What is a CIS deduction?

A CIS deduction is the tax amount that contractors withhold from a subcontractor’s payment before passing it to HMRC. These deductions count as advance payments toward the subcontractor’s income tax and National Insurance contributions.

If too much tax is deducted, subcontractors may be eligible for a CIS tax refund.

How do CIS tax refunds work?

If you’ve overpaid CIS tax, you may be able to claim a refund at the end of the tax year.

Let’s have another look at John:

👉 Let’s say John’s annual income is £18,000:

👉 John owes HMRC exactly £2,370.20 – that’s £1,230 for income tax  and £1,015 for national insurance (in the 22/23 tax year) 🤓

👉 However, Louie deducted CIS tax totaling £3,600 throughout the year. (Yep, Louie’s made a mistake)

👉 John has overpaid, meaning he is due a refund

HMRC will usually alert you automatically when you’ve paid too much or too little tax. Otherwise, you can claim a refund here.

Need to file your CIS tax return?

Well, it’s your lucky day! Get your CIS tax return filed by an accredited accountant. 

Our CIS accountants have specialist knowledge of construction worker taxes, including what expenses you can claim, how to maximise your profit, and more. They can even claim a CIS refund where due.

Find out more here.