The Construction Industry Scheme (CIS) is a tax-deduction scheme introduced by HM Revenue & Customs (HMRC) to regulate payments from contractors to subcontractors within the UK construction sector. It is designed to minimise tax evasion in the industry, ensuring subcontractors pay the correct amount of tax and National Insurance.
While CIS primarily applies to contractors and subcontractors, umbrella companies operating in the construction sector must also understand how the scheme impacts payroll and tax obligations for their workers.
CIS applies to construction work carried out in the UK. Under the scheme:
The standard deduction rate is 20% for registered subcontractors and 30% for those not registered under the scheme. Some subcontractors may also qualify for gross payment status, meaning they receive full payments with no deductions, provided they meet certain HMRC criteria.
Want to know how much you’ll take home after CIS deductions? Use our free CIS Tax Deduction Calculator to estimate your earnings quickly and accurately — whether you’re registered, unregistered, or on gross payment status.
A business or organisation must register as a CIS contractor if it:
Contractors are legally required to verify subcontractors with HMRC and deduct the correct amount of tax before making payments.
If you work for a contractor and are not on their payroll, you may be considered a subcontractor. Subcontractors should register for CIS to avoid the higher 30% deduction rate. Registration is optional, but unregistered workers face larger upfront tax deductions.
CIS applies to a wide range of construction-related activities, including:
However, not all work is covered. CIS excludes:
Understanding which activities fall under CIS is crucial to ensure compliance.
As a contractor, compliance with CIS is a legal obligation, and failure to meet requirements can result in hefty fines and penalties.
Contractors must notify HMRC when they start engaging subcontractors.
This determines their CIS registration status and applicable deduction rate.
Deduct 20% (registered) or 30% (unregistered) from payments and pass these to HMRC.
Issue statements to subcontractors showing deductions made and paid to HMRC.
Submit monthly CIS returns summarising payments and deductions made. You must also declare that subcontractors are not employees.
Maintain records of payments, invoices, and CIS deductions for at least three years.
Managing CIS can be administratively burdensome, particularly for contractors engaging multiple subcontractors. Mistakes in deductions, late returns, or errors in verification can lead to fines, disputes, and strained subcontractor relationships.
Some contractors outsource CIS compliance to payroll providers or umbrella companies to simplify operations and reduce risk.
If the worker is employed by the umbrella company, CIS does not apply — PAYE rules are used.
If the worker is self-employed and operating under CIS, the umbrella company must act as a contractor under the scheme.
The umbrella company must register with HMRC as a contractor and verify subcontractors before making payments.
The umbrella must apply CIS deductions appropriately and pass them to HMRC.
Payment and deduction statements must be issued to subcontractors, and monthly returns filed with HMRC.
Umbrella companies must assess the employment status of workers under IR35 and other tax rules, to determine whether CIS applies or if the worker should be processed through PAYE.
Some umbrella companies operate CIS-compliant solutions for self-employed workers in construction. This can benefit:
However, HMRC closely monitors umbrella companies using CIS for disguised employment. It's essential that the umbrella firm does not wrongly classify employees as subcontractors, which can lead to compliance issues.
Subcontractors who meet strict criteria (such as maintaining good tax compliance, proper business records, and financial stability) can apply for Gross Payment Status.
Benefits:
Subcontractors must apply directly to HMRC and will be monitored to ensure ongoing compliance.
| Feature | CIS | PAYE |
|---|---|---|
| Applies to | Subcontractors in construction | Employees |
| Tax deducted by | Contractor or umbrella company | Employer |
| Deduction rate | 20% (registered) or 30% (unregistered) | Based on income tax bands |
| NI Contributions | Subcontractor responsible | Employer and employee both contribute |
| Payslips | Not mandatory, but deduction statements are | Mandatory |
| Status | Self-employed | Employee |
The Construction Industry Scheme (CIS) is a crucial part of the UK tax system for the construction sector. For contractors, understanding and complying with CIS obligations is essential to avoid penalties and maintain good relationships with subcontractors.
For umbrella companies, the decision to engage workers under CIS must be backed by clear evidence of self-employment, correct registration, and full HMRC compliance. Misclassification or poor administration can expose umbrella firms and their clients to significant risks.
By staying informed and working with experienced payroll providers or compliance advisors, both contractors and umbrella companies can navigate CIS requirements smoothly and efficiently.