The Construction Industry Scheme (CIS) aims to combat non-compliant self-employed workers who fail to register their cash-in-hand pay with HMRC. As the name suggests, this is aimed at builders and people working in that business line.
How does it work?
CIS works by having a contractor deduct money from a subcontractor's payments and pass it to HMRC.
The deductions count as advance payments towards the subcontractor's tax bill.
While contractors must register for the scheme, subcontractors are not obligated to; however, not registering would result in subcontractors' deductions being made at 30% instead of 20%.
CIS tax is only deducted on labour. If a subcontractor is paid £300, but £100 was payment for money spent on materials, then CIS tax would be deducted from the £200 labour costs. Seeing as 20% of 200 is 40, the subcontractor would take home £160 and have a prepayment of £40 towards their tax bill.
Here's how CIS works from a tax perspective for a subcontractor:
The first £12570 in profit will be taxed at 0%, so any tax paid on those earnings through CIS will be refunded to the worker once the tax return is submitted.
Earnings between £12570 and £50270 will be taxed at 29% (20% income tax and 9% National Insurance). This is where the amount you get back from a rebate starts to fall, because your subcontractor is paying 20% tax on your behalf, but HMRC will be taxing you at 29% at the end of the year, so the more you continue to earn, the lower your rebate will be.
After £50270 you start to be taxed at 42% (40% income tax and 2% National Insurance).
From 6 April 2025, changes to National Insurance will affect take-home pay for many workers. For more details, here.
It's important to remember that these tax bands are based off your profits, so after expenses are deducted, which is why it's crucial to have a reliable accountant that’s making sure you're always in the best position that you can be in. For example if you’ve earned £40,000 through CIS, then you would have paid £8000 in CIS tax over the year (at 20%). But, if you’ve purchased a £30,000 van, we would use just enough capital allowances to set your profit to £12570, meaning no tax is due and you get your full £8000 back, and there will be some value in the van left over to claim in future years
Contractor Responsibilities under CIS
A CIS contractor must pay HMRC any deductions they've made every month or quarterly in some cases. If you pay them monthly, the payments must be made by the 22nd of each month (or the 19th if you're paying by post).
As previously stated, if subcontractors do not register for CIS, their deductions will be made at 30% instead of 20%. However, if a contractor fails to register, they could face a £3000 fine for not keeping CIS records and a £100 monthly penalty for every missed return.
Contractors are the backbone of the CIS scheme; they must fulfil their role correctly because the domino effect could amplify their mistakes. For example, a subcontractor could be expecting their tax to be paid through the CIS scheme via their contractor, however, if the contractor isn't registered for CIS, forgot to make the deductions, or even worse, attempts to pocket the payments for themselves, then the unsuspecting subcontractor may be hit with a massive tax bill that should have already been prepaid and will now have to dispute. The effects of the contractor failing to register their workers' CIS payments to HMRC can be costly and stressful for everyone involved.
Closing Points
Navigating CIS correctly is key to success, whether you're a contractor or a subcontractor. We recommend obtaining and keeping all records of paid CIS and choosing Short & Sons Accountants to manage your tax matters.
We hope this comprehensive introduction has helped with your understanding of the construction industry scheme, however if you have any queries, please get in touch!