The three CIS deduction rates at a glance
When a contractor pays a subcontractor under the Construction Industry Scheme, HMRC requires a deduction to be made and remitted as an advance towards the subcontractor's tax bill. The rate applied depends entirely on the subcontractor's verified status. For 2026/27 there are three rates, unchanged from recent years:
| Subcontractor status | Deduction rate | Who it applies to |
|---|---|---|
| Gross Payment Status (GPS) | 0% | Subcontractors who have qualified for GPS and are paid in full |
| Registered subcontractor | 20% | Subcontractors verified by HMRC as CIS-registered |
| Unregistered subcontractor | 30% | Subcontractors HMRC cannot verify as registered |
The rate is not something the contractor or subcontractor chooses. It is set by HMRC's verification of the subcontractor's status, which the contractor must carry out before making the first payment. Our guide to what CIS is and how the scheme works explains the full framework behind these rates.
The most important rule: deductions apply to labour only
This is the single most commonly misunderstood point in CIS, and it matters because it directly affects how much is taken from every payment.
CIS deductions apply to the labour element of a payment only. The cost of materials that the subcontractor has directly purchased for the job is excluded from the deduction base. The contractor deducts 20% (or 30%) on the labour figure, not on the total invoice value.
"Materials" in this context means materials, consumables and equipment the subcontractor bought specifically for the contract. It does not include the subcontractor's own plant, tools or vehicles, and it does not cover the cost of labour hired in from other people. Only the direct material purchase cost comes out of the deduction base.
The practical result is that a subcontractor who invoices for both labour and materials will have a smaller deduction than one who invoices for labour alone, because the materials portion is never touched by CIS. The subcontractor must be able to demonstrate the split: if materials are not separately identified on the invoice, the contractor is required to treat the whole payment as labour and deduct accordingly.
Worked invoice example: labour vs materials split
Here is a concrete example. A registered groundworker invoices a main contractor for a week's drainage work:
| Invoice line | Amount |
|---|---|
| Labour (5 days on site) | £1,800 |
| Materials purchased for the job (pipes, fittings, hardcore) | £950 |
| Total invoice value | £2,750 |
The contractor verifies the groundworker as CIS-registered. The deduction is calculated as follows:
| Step | Amount |
|---|---|
| Total invoice | £2,750 |
| Less: materials (excluded from deduction base) | (£950) |
| Labour element subject to CIS deduction | £1,800 |
| CIS deduction at 20% | £360 |
| Amount paid to subcontractor | £2,390 |
| Amount remitted to HMRC by contractor | £360 |
If the same groundworker were unregistered, the 30% rate would apply to the same £1,800 labour figure, producing a deduction of £540 and a payment of £2,210. That £180 monthly difference on a single week's invoice illustrates exactly why registration is not optional in any practical sense, even though it is not legally compulsory.
If the groundworker had Gross Payment Status, the contractor would pay the full £2,750 with no deduction at all.
How deductions appear on your CIS payment statement
For every tax month in which a deduction is made, the contractor must issue the subcontractor a CIS payment and deduction statement. This is not optional: it is a statutory document. Using the example above, the statement would show:
| Statement field | Figure |
|---|---|
| Gross amount paid (before deduction) | £2,750 |
| Cost of materials (excluded from deduction) | £950 |
| Amount liable to deduction (labour) | £1,800 |
| Deduction rate applied | 20% |
| Amount deducted | £360 |
| Net payment to subcontractor | £2,390 |
Keep every statement you receive across the tax year. These documents are the evidence you submit when reclaiming overpaid tax. A lost statement means extra correspondence with HMRC, and potentially a delayed refund. If a contractor has not issued a statement, you are entitled to request one and the contractor is required to provide it.
For sole traders, the total of the deduction column across all statements for the year goes directly on the Self Assessment return as tax already paid. For limited companies, the equivalent figure feeds into the Employer Payment Summary reclaim process, which can operate in real time during the year rather than waiting until after the tax year closes.
Why 30%? The unregistered rate explained
The 10-percentage-point gap between registered (20%) and unregistered (30%) is deliberate. When HMRC cannot verify a subcontractor through its CIS database, it has no tax record to work with. The 30% rate reflects a higher advance to protect the tax position where the individual's compliance history is unknown.
The practical message for any subcontractor who is not yet CIS-registered is straightforward. Registration is free, takes around 20 minutes online or by phone, and brings the rate down from 30% to 20% immediately. On monthly labour payments of £3,000, the difference is £300 per month, or £3,600 across a full tax year, paid unnecessarily to HMRC as a larger-than-needed advance.
Our step-by-step guide to registering for CIS as a subcontractor covers how to register, what information you need, and how long the verification takes.
Gross Payment Status: the 0% route
Gross Payment Status removes the deduction entirely. A subcontractor with GPS is paid in full, with the contractor making no CIS deduction at all. The subcontractor settles their tax through Self Assessment (sole trader) or Corporation Tax (limited company), and the timing and cashflow of the tax payment shifts from monthly source deductions to the normal tax year cycle.
GPS is not awarded automatically. A subcontractor must apply to HMRC and pass three qualifying tests:
- Business test. The subcontractor carries out construction work (or provides labour for it) in the UK, through a bank account.
- Turnover test. Net annual CIS turnover must reach the relevant threshold: £30,000 for a sole trader; £30,000 per director (or £100,000 total) for a limited company; £30,000 per partner (or £100,000 total) for a partnership. "Net" means excluding VAT and the cost of materials, consistent with the labour-only deduction base.
- Compliance test. All tax obligations met on time for the past 12 months, including Self Assessment returns, VAT, PAYE and any overdue tax bills.
All three tests must be passed. A subcontractor who meets the turnover threshold but has a late Self Assessment return will be refused GPS or have an existing GPS removed.
From 6 April 2026, GPS is also harder to keep. Under Finance Act 2026, HMRC can remove GPS immediately and without advance notice where a subcontractor "knew or should have known" about fraudulent connections in their supply chain. The standard means that failing to carry out due diligence is enough for revocation, even without any intent to defraud. A removed GPS also now triggers a five-year reapplication ban, up from one year previously. Our dedicated CIS Gross Payment Status guide covers the qualifying tests and the April 2026 changes in full.
How the rate level drives over-deduction and refunds
Whether the deduction rate is 20% or 30%, both rates are applied to gross labour payments with no deduction for business expenses, tools, fuel, personal allowance or any other relief. The deduction is an advance, not a final charge. The actual tax owed is calculated later, on net profit, after expenses, and subject to the personal allowance.
Consider a sole-trader roofer with the following position for 2026/27:
| Item | Amount |
|---|---|
| Gross CIS labour receipts for the year | £42,000 |
| Allowable business expenses (van, materials, tools, fuel, insurance) | £14,000 |
| Net profit | £28,000 |
| Personal allowance 2026/27 | £12,570 |
| Taxable income | £15,430 |
| Income tax at 20% on £15,430 | £3,086 |
| Class 4 NIC (2026/27: 6% on £28,000 minus £12,570) | £926 |
| Total tax and NIC due for the year | £4,012 |
| CIS deductions already paid (20% x £42,000) | £8,400 |
| Overpayment due back as a refund | £4,388 |
That refund of £4,388 arises entirely from the structure of the scheme: the 20% rate is applied at source each month before any of the roofer's legitimate expenses or personal allowance are considered. There is nothing unusual about this scenario. It is the normal outcome for a registered sole-trader subcontractor who incurs reasonable expenses in carrying out the work. The refund is not a loophole or an estimate: it is the mechanical result of a higher advance being taken than the final tax bill turns out to require.
The same arithmetic applies at 30% for an unregistered subcontractor, only with a larger gap: on £42,000 of labour receipts, the 30% deduction would be £12,600, producing an overpayment of roughly £8,588 against the same £4,012 tax bill. That is why registration matters so much: the unregistered subcontractor is simply over-advancing a larger sum to HMRC for no benefit.
The mechanism for claiming the refund depends on how the subcontractor trades. A sole trader reclaims via the annual Self Assessment return, filed after 5 April and usually processed by HMRC within a few weeks. A limited company can reclaim in real time during the year by offsetting CIS deductions suffered against PAYE and other liabilities through the Employer Payment Summary, which means the cash returns faster rather than sitting with HMRC until after the year-end. The CIS refund service covers both routes and handles the claim on your behalf.
What the deduction is, and what it is not
The CIS deduction is an advance payment on account of the subcontractor's income tax and Class 4 National Insurance. It is collected at source by the contractor, paid over to HMRC, and credited against the subcontractor's final liability. It is not an employer cost, it is not a penalty, and it does not represent a final settlement of the tax position.
This distinction matters when subcontractors review their payment statements and see a large deduction figure. The amount shown is money that has gone to HMRC on their behalf, not money lost. If the final tax calculation shows they owe less than the sum of their CIS deductions for the year, the excess comes back.
It also matters when subcontractors consider whether to register for CIS. The cost of not registering is not just the immediate reduction in take-home pay from the 30% rate. It is also the administrative burden of reclaiming a larger overpayment at year-end rather than a smaller one, and the fact that HMRC will have had a larger sum sitting with them interest-free for longer.
To check a specific invoice, use our CIS deduction calculator. Enter the labour and materials amounts and your registration status and it applies the correct 0%, 20% or 30% rate for you.
The practical recommendation is consistent: register for CIS, keep good records of your labour and materials split, retain every payment statement, and claim your overpayment promptly at the end of each tax year. If you are earning enough to consider it, the GPS route eliminates the deduction entirely, subject to passing the qualifying tests and maintaining full compliance throughout the year.