The Construction Industry Scheme (CIS) is a mandatory tax system created by HMRC to regulate how payments are made to subcontractors in the UK construction sector. If you work as a contractor, understanding CIS payroll and how tax deductions work is essential for staying compliant and avoiding financial penalties. Many contractors struggle with the complexity of CIS, including verifying subcontractors, applying correct deduction rates, and submitting accurate monthly returns.

In this blog, we will break down how CIS payroll works, why tax deductions are necessary, the different deduction rates, compliance responsibilities, and how professional support from companies like The Infinity Group can make CIS payroll much simpler and stress-free.

1. What Is CIS Payroll?

CIS payroll refers to the process contractors must follow to pay subcontractors in the construction industry while deducting tax at source on behalf of HMRC. Contractors must register for CIS and follow specific payroll rules every time they pay a subcontractor.

CIS payroll involves:

  • Verifying subcontractors with HMRC.
  • Deducting tax at 0%, 20%, or 30%.
  • Submitting monthly CIS returns.
  • Keeping digital records.
  • Paying deductions to HMRC.

Even though the term “payroll” is used, subcontractors under CIS are not employees. They are self-employed individuals or limited companies, but contractors still have responsibility for deducting and paying tax on their behalf.

2. Why Are Tax Deductions Required?

HMRC introduced tax deductions under CIS to reduce tax evasion in the construction sector. Rather than allowing subcontractors to declare tax at year-end, the system ensures that tax is collected in advance.

The deductions made by contractors are then used by HMRC to:

  • Offset the subcontractor’s tax liability.
  • Contribute towards National Insurance.
  • Reduce the risk of unpaid taxes.

If contractors fail to make deductions or submit returns correctly, HMRC may hold them responsible for the unpaid tax, even if it was the subcontractor’s obligation. This is why understanding CIS tax deductions is so important.

3. Who Needs to Register for CIS?

You must register as a contractor if you:

  • Pay subcontractors to carry out construction work.
  • Spend more than £3 million on construction in a 12-month period (even if you are not in the construction industry).

You must register as a subcontractor if you:

  • Work for contractors and are paid for construction services.

Some businesses may act as both contractor and subcontractor. If so, they must register for both roles.

4. Types of Work Covered by CIS

CIS covers most construction-related work, such as:

  • Site preparation.
  • Building and demolition.
  • Repairs and maintenance.
  • Decorating.
  • Installation of systems (heating, lighting, plumbing).
  • Civil engineering.

However, some activities are not included, such as:

  • Architecture and surveying.
  • Carpet fitting.
  • Delivering materials.
  • Scaffolding hire without labour.

Knowing what is covered helps ensure you apply CIS correctly.

5. How to Verify Subcontractors Before Paying

Before making any payment, contractors must verify subcontractors with HMRC. This process determines the correct tax deduction rate.

Verification is done using:

  • Subcontractor’s legal name.
  • UTR (Unique Taxpayer Reference).
  • National Insurance number or company registration number.

Once verified, HMRC will inform you of the correct deduction status.

6. CIS Tax Deduction Rates

There are three possible rates a contractor must apply:

1. Gross Payment Status (0%)

No deductions are made. The subcontractor receives full payment.
To qualify, subcontractors must:

  • Have a good tax history.
  • Be registered as a business.
  • Have a turnover above a certain threshold.

2. Standard Rate (20%)

Applied to most verified subcontractors.

3. Higher Rate (30%)

Applied when:

  • The subcontractor is not registered.
  • Verification details cannot be confirmed.

Contractors must apply the correct rate every time or face penalties from HMRC.

7. What Is Deducted Under CIS?

CIS deductions are taken from the labour cost, not the total invoice. You must not deduct VAT or the cost of materials from the labour amount.

Here is the correct deduction calculation:

  1. Start with the total invoice amount.
  2. Subtract VAT.
  3. Subtract materials, consumables, equipment hire, and travel expenses.
  4. Apply the deduction rate (20% or 30%) to the remaining labour cost.

This ensures deductions only apply to the subcontractor’s earnings from labour.

8. Monthly CIS Returns

Contractors must submit a CIS Return to HMRC every month, declaring:

  • Subcontractor details.
  • Payments made.
  • Deductions taken.

The deadline is the 19th of every month following the payment month. For example, payments made in April must be reported by 19 May.

Failure to submit on time results in automatic penalties:

  • 1 day late: £100 fine.
  • 2 months late: £200.
  • After 6 months: £300 or 5% of due tax.
  • Continued failure can lead to thousands in penalties.

Accurate and timely CIS returns are critical for compliance.

9. Paying Deductions to HMRC

Once deductions are made from subcontractor payments, contractors must pay this amount to HMRC. Payments are due at the same time as PAYE and National Insurance contributions, usually around the 22nd of each month (or 19th if paying by post).

Failure to pay deductions can lead to interest charges and tax investigations.

10. Record Keeping Requirements

Contractors must keep digital records of:

  • Subcontractor invoices.
  • Verification numbers.
  • Payment statements.
  • CIS returns.
  • Deduction amounts.

Records must be kept for at least three years, although five to six years is safer in case of HMRC enquiries.

Proper record keeping helps avoid disputes, penalties, and compliance issues.

11. CIS and Self-Assessment for Subcontractors

Subcontractors must report income through the Self-Assessment tax return at the end of the tax year. Any CIS deductions made by contractors are treated as advance tax payments.

If too much tax was deducted, subcontractors can claim a refund.
If too little tax was deducted, subcontractors will need to pay the difference to HMRC.

This system ensures subcontractors remain responsible for their tax affairs even when deductions are made at source.

12. The Role of CIS Payroll Software

HMRC requires accurate digital records. Having the right payroll software can help you:

  • Verify subcontractors automatically.
  • Calculate deductions correctly.
  • Submit digital returns to HMRC.
  • Track payments and liabilities.
  • Remain compliant with Making Tax Digital (MTD).

Reliable CIS payroll software saves time, prevents errors, and protects your business from penalties.

13. Common Mistakes Contractors Make with CIS

Even experienced contractors make CIS mistakes. Some of the most common include:

  • Not verifying subcontractors.
  • Using the wrong deduction rate.
  • Deducting VAT or materials incorrectly.
  • Missing monthly return deadlines.
  • Submitting incorrect figures.
  • Poor record keeping.
  • Not informing HMRC when no payments are made.

Each of these mistakes can lead to fines or HMRC investigations. Professional CIS payroll services help avoid these errors.

14. Why Outsourcing CIS Payroll Is a Smart Choice

Managing CIS manually is stressful, time-consuming, and risky. Outsourcing to specialists ensures:

  • Accurate tax deductions.
  • On-time CIS return submissions.
  • Proper verification of subcontractors.
  • Compliance with HMRC rules.
  • Digital record keeping.
  • Quick response to HMRC queries.
  • Reduced penalties and stress.

Instead of spending hours on admin, you can focus on running and growing your business.

15. How The Infinity Group Can Help

The Infinity Group is a trusted UK payroll and compliance provider specialising in construction, CIS, and subcontractor management. They offer a complete CIS payroll service that includes:

  • Registering contractors and subcontractors for CIS.
  • Verifying subcontractor details with HMRC.
  • Calculating accurate tax deductions.
  • Preparing and submitting monthly CIS returns.
  • Providing deduction statements to subcontractors.
  • Managing payments to HMRC.
  • Keeping digital, compliant records.
  • Offering advice on tax, CIS schemes, and compliance.

The Infinity Group understands the unique challenges of the construction industry and ensures contractors stay compliant while saving time and money. Their expertise in payroll, CIS, and HMRC regulations gives businesses confidence and peace of mind.

16. Final Thoughts

CIS payroll and tax deductions are essential responsibilities for contractors working in the UK construction industry. Understanding how deductions work, applying the correct rates, verifying subcontractors, and submitting accurate monthly returns are all crucial for compliance with HMRC.

However, CIS is complex and mistakes can lead to costly penalties or investigations. That is why many contractors choose to outsource CIS payroll to experienced providers like The Infinity Group. With professional support, you can ensure accuracy, stay compliant, and focus on delivering quality construction work without worrying about payroll or tax errors.