CIS and PAYE are two different relationships, not two rates
The most common mistake in any CIS versus PAYE comparison is to treat the two as different rates of tax on the same income. They are not. They reflect two different legal relationships, and almost everything that follows, the expenses you can claim, the National Insurance you pay, the rights you receive, the cash flow, even the Making Tax Digital rules, falls out of that one structural difference.
Under PAYE you are an employee. Your employer runs your pay through payroll, deducts income tax and National Insurance every pay period using a tax code that spreads your personal allowance across the year, and the amount taken is broadly the right amount by the time the year ends. You cannot deduct the cost of running your work against your wages, beyond a narrow set of strictly defined employment expenses. In return you receive holiday pay, statutory sick pay, an employer pension contribution and the full suite of employment rights.
Under CIS you are self-employed, running a business that happens to be paid by a contractor. The contractor deducts a flat percentage from the labour element of your invoice as an advance against your eventual tax bill, but your real liability is calculated on your profit after expenses, settled through your annual Self Assessment return. You can deduct the genuine costs of the trade, and you carry the risk and the admin yourself. You receive no holiday pay, no sick pay and no employer pension.
This guide is the deep comparison. We already have a shorter overview of the basics with a single day-rate example in our guide to the key differences between CIS and PAYE, so start there if you want the quick version. This pillar goes further: exact take-home at three income levels, a value on the employment rights PAYE adds, the cash-flow difference in both directions, the false self-employment test that decides which system you are allowed to use, and the Making Tax Digital trap tested on gross CIS income. All figures are 2026/27 on HP-locked rates.
The expense advantage: what CIS lets you deduct that PAYE does not
The single biggest reason a CIS subcontractor takes home more than a PAYE employee on the same gross income is that the subcontractor is taxed on profit after expenses, while the employee is taxed on the full wage. A self-employed construction worker can deduct the genuine running costs of the trade through Self Assessment, including:
- Business mileage at the approved mileage allowance payment (AMAP) rate of 55p per mile for the first 10,000 business miles and 25p per mile thereafter, from 6 April 2026. For a subcontractor driving between sites this is often the largest single deduction.
- Tools and equipment bought for the work, from hand tools to power tools and consumables.
- A van used for the business, including running costs, or a car at the AMAP rate above.
- Protective equipment (PPE), work boots, hi-vis and specialist clothing required for the job.
- A work phone, the business proportion of phone and data, professional subscriptions, accountancy fees and relevant training.
A PAYE employee can claim almost none of this. Employment expenses must be incurred wholly, exclusively and necessarily in the performance of the duties, a far stricter test, and an employee can never deduct a vehicle bought for work, materials or general overheads. The same worker, on the same money, is taxed on a higher figure as an employee than as a subcontractor. That is the expense advantage, and it does most of the work in the comparison below. Our guide to allowable expenses for CIS subcontractors sets out the full list and the records to keep.
Take-home compared at £35,000, £55,000 and £80,000 gross (2026/27)
Here is the comparison done properly at three income levels. In each case the CIS column assumes £5,000 of allowable expenses (a modest figure for a subcontractor with a van and tools) and the registered 20% status. The PAYE column takes the same gross with no expense deduction, as an employee. The CIS subcontractor pays income tax and Class 4 National Insurance; the PAYE employee pays income tax and employee Class 1 National Insurance. Personal allowance is £12,570, the basic rate band runs to £50,270, and the higher rate is 40% above that.
| 2026/27, gross income | £35,000 CIS | £35,000 PAYE | £55,000 CIS | £55,000 PAYE | £80,000 CIS | £80,000 PAYE |
|---|---|---|---|---|---|---|
| Gross labour income / wages | £35,000 | £35,000 | £55,000 | £55,000 | £80,000 | £80,000 |
| Allowable expenses | (£5,000) | nil | (£5,000) | nil | (£5,000) | nil |
| Taxable profit / earnings | £30,000 | £35,000 | £50,000 | £55,000 | £75,000 | £80,000 |
| Income tax | £3,486 | £4,486 | £7,486 | £9,432 | £17,432 | £19,432 |
| National Insurance | £1,046 (Class 4) | £1,794 (Class 1) | £2,246 (Class 4) | £3,111 (Class 1) | £2,757 (Class 4) | £3,611 (Class 1) |
| Total tax and NI | £4,532 | £6,280 | £9,732 | £12,543 | £20,189 | £23,043 |
| Net take-home | £30,468 | £28,720 | £45,268 | £42,457 | £59,811 | £56,957 |
| CIS advantage on take-home | about £1,748 | about £2,811 | about £2,854 | |||
The pattern is consistent: CIS produces a higher take-home at every level, by roughly £1,750 at £35,000, £2,800 at £55,000 and £2,850 at £80,000. Two forces drive it. First, the £5,000 expense deduction is worth more the higher your marginal rate, which is why the advantage grows. Second, self-employed Class 4 National Insurance at 6% on the main band is two percentage points below employee Class 1 at 8%, so the subcontractor keeps more of every pound in that band regardless of expenses.
The CIS advantage widens between £35,000 and £55,000 because at the higher level the £5,000 of expenses is being deducted from income that would otherwise be partly taxed at 40%, so it saves more tax. Above the higher-rate threshold, every pound of expense and every percentage point of National Insurance difference is worth more.
These are take-home figures only. They do not include the value of what PAYE adds, and at the £35,000 level the £1,748 gap can be smaller than the worth of an employer pension contribution and paid holiday. The next section puts numbers behind that.
What the take-home table leaves out: rights, security and benefits
A take-home comparison that stops at the net figure flatters CIS, because it ignores everything an employee receives that a self-employed subcontractor does not. PAYE is not just a way of paying tax, it carries a package of statutory rights and employer contributions with real monetary value.
| Feature | CIS (self-employed subcontractor) | PAYE (employee) |
|---|---|---|
| Holiday pay | None. Self-employed workers have no statutory holiday entitlement | Minimum 5.6 weeks paid statutory holiday per year |
| Sick pay | None. No statutory sick pay for the self-employed | Statutory Sick Pay of £123.25 per week for up to 28 weeks (2026/27) |
| Employer pension | None. You must arrange and fund your own pension | Auto-enrolled: minimum 8% total, of which 3% is the employer's contribution |
| Employment rights | Limited. No unfair dismissal, redundancy or notice protection | Full employment rights including notice, redundancy and unfair dismissal protection after qualifying service |
| Income stability | Variable. You carry the risk of gaps between contracts | Contracted wage, more predictable income |
| Employer National Insurance | Not applicable (you are not an employee) | Employer pays 15% above £5,000 per year on your wages, funding the wider system behind your rights |
| IR35 / status risk | False self-employment risk if the relationship is really employment | None: employment is the correct status, so no reclassification exposure |
The employer pension is the clearest example of hidden value. On a £35,000 wage, a 3% employer contribution is over £1,000 a year going into your pension that you never see in take-home, which on its own narrows the £1,748 CIS advantage at that level to a few hundred pounds. Add paid holiday, sick pay and a notice period, and the comparison at modest income becomes genuinely close. At £55,000 and £80,000 the cash advantage of CIS is large enough that the rights rarely tip it back, but they remain a real consideration for anyone who values income protection.
The cash-flow difference: in-year accuracy versus advance and refund
The two systems also differ in when the right amount of tax is settled, and this cuts in opposite directions depending on your income.
PAYE pays the right amount in-year. Because your tax code spreads the personal allowance across each pay period, the deductions taken each month broadly equal the tax you owe. By 5 April you are square. Refunds are uncommon and only arise from coding errors, mid-year job changes or untaxed income. The cash-flow position is smooth and predictable.
CIS takes an advance at source and reconciles at year end. The 20% is deducted from your labour before any personal allowance or expenses are considered, so the amount taken rarely matches the tax you actually owe. For most subcontractors it takes too much, and you reclaim the difference through Self Assessment after the tax year. Look back at the table:
- At £35,000 gross, the contractor deducts 20% of £35,000, which is £7,000, but the actual tax and Class 4 bill is only £4,532. You are owed roughly £2,468 back.
- At £55,000 gross, £11,000 is deducted against a £9,732 bill, a smaller refund of around £1,268, because more of your profit is now taxed at 40% which the flat 20% deduction does not cover.
- At £80,000 gross, only £16,000 is deducted but the bill is £20,189, so there is no refund at all. You face a balancing payment of around £4,189, because the 20% taken at source falls well short of the 40% due on the upper slice of profit.
So CIS does not always mean a refund. At lower and middle incomes it usually does, and that refund is real money to reclaim every year. At higher incomes the flat deduction under-collects, and you need to set money aside for a balancing payment rather than expect a cheque. Reclaiming overpaid years is covered in our guide to how to claim a CIS tax refund. Either way the refund is the front door to getting your wider tax position right, not the end of it, which is how we treat the CIS refund: recover what you are owed, then keep you on a clean footing.
The risk that decides everything: false self-employment
Before any of the take-home arithmetic matters, one question has to be answered: are you actually allowed to be on CIS at all? Employment status is not a choice you and the contractor make for convenience or to boost take-home. It is fixed by the reality of the working relationship, and HMRC can override the paperwork if the facts point to employment. Getting it wrong is called false self-employment, and construction is one of HMRC's most actively policed sectors for it.
HMRC and the courts apply a multi-factor test drawn from case law. The three core questions are:
- Control. Does the contractor control how the work is done, or only what the finished result should be? A worker told the method, hours, sequence and location day to day looks like an employee. A worker handed a specification and left to deliver it looks like a business.
- Personal service. Can the worker send a substitute to do the job? A genuine, unfettered right to send someone else points away from employment. If substitution could never happen in practice, or the contractor could refuse any substitute, the clause carries little weight.
- Mutuality of obligation. Is the contractor obliged to offer work and the worker obliged to accept it on an ongoing basis? Genuine contracting ends when the project ends, with no standing expectation of more.
No single factor settles it; HMRC weighs the whole picture, including whether the worker takes financial risk, provides their own tools, works for more than one contractor and is integrated into the permanent workforce. We go through each factor with construction examples in our guide to the CIS employment status and self-employed test.
The cost of getting it wrong falls hardest on the contractor. Where HMRC reclassifies a CIS worker as an employee, the contractor typically owes unpaid employer National Insurance at 15% on the payments made, unpaid PAYE, plus interest and penalties, and it cannot be back-dated to PAYE to dodge the liability. The investigation period can stretch back several years, and the worker can also face an adjustment. This is why choosing CIS purely because the take-home is higher, in a relationship that is genuinely employment, is a false economy that exposes both sides.
When PAYE beats CIS
For all that the take-home figures favour CIS, PAYE is the better answer for a large number of construction workers. It wins where the things it provides are worth more than the extra cash:
- Low expenses. If you do little business mileage and use the contractor's tools and materials, the CIS expense advantage shrinks. With £1,000 of expenses rather than £5,000, the take-home gap narrows considerably.
- You value the employer benefits. The employer pension contribution, statutory sick pay and paid holiday have real worth. For a worker who would otherwise save nothing for retirement and have no income protection, that security can outweigh a few thousand pounds of net pay.
- You want stability and simplicity. PAYE means no Self Assessment, no quarterly Making Tax Digital filing, no setting money aside for a balancing payment, and a predictable wage. For many people that certainty is worth paying for.
- The relationship is genuinely employment. If you fail the self-employed test above, PAYE is not just better, it is legally required, and CIS would be false self-employment.
When CIS beats PAYE
CIS is the stronger route where you genuinely run your own construction business and can use the structure to its full extent:
- High allowable expenses. Heavy business mileage, your own van, a real toolkit and equipment all reduce taxable profit and widen the take-home gap. The more you genuinely spend running the trade, the better CIS looks.
- Flexibility and multiple contractors. If you work for several contractors, set your own approach and take financial risk, you are a business, and CIS reflects that.
- Gross payment status potential. A subcontractor who qualifies for gross payment status is paid with no deduction at all (0%), removing the advance entirely and settling tax through Self Assessment. That is the strongest cash-flow position available, and it is only open to the self-employed route. Our gross payment status guide covers the qualifying tests.
- Retained profit through a limited company. At higher or variable earnings, the CIS route can be taken a step further by incorporating, so profit can be retained in the company and taxed once at the corporation tax rate rather than all of it being taxed on you personally every year. Dividends drawn out are taxed at the 2026/27 rates of 10.75%, 35.75% and 39.35%. The trade-offs, including refund timing through the Employer Payment Summary, are in our guide to CIS sole trader versus limited company.
Making Tax Digital: tested on gross CIS income, before deductions
One CIS-specific rule changes the admin side of the comparison and catches subcontractors out repeatedly. Making Tax Digital for Income Tax (MTD ITSA) requires sole traders and partnerships to keep digital records and file quarterly updates through compatible software once their qualifying income passes a threshold. From April 2026 the threshold is £50,000, dropping to £30,000 from April 2027.
The trap is how the threshold is measured. It looks at your gross income before any deduction, not the net amount you bank after CIS. A subcontractor invoicing £60,000 of labour who receives £48,000 after the 20% CIS deduction is tested on the £60,000 figure, so they are in scope from April 2026, even though their bank statements look like £48,000 and feel comfortably under the threshold. The deduction does not reduce the figure that counts.
This is purely a CIS and self-employment issue. PAYE employees are not in MTD for Income Tax at all, because their tax is handled through payroll. So part of the real comparison is administrative: choosing CIS at this level brings a quarterly filing obligation that PAYE does not, and you need to size it on gross turnover, not on what lands in your account. We work through the gross-income point in detail in our guide to Making Tax Digital for Income Tax and CIS.
So which is right for you?
The take-home table is unambiguous: at £35,000, £55,000 and £80,000 gross, the registered CIS subcontractor keeps more than the PAYE employee on the same money, by roughly £1,750, £2,800 and £2,850 respectively, driven by the expense deduction and the lower self-employed National Insurance rate. But take-home is only one column of a wider ledger.
The honest decision weighs that cash advantage against three things the table cannot show: the value of the employment rights and pension PAYE provides, the cash-flow reality that CIS takes an advance and reconciles at year end (a refund at lower incomes, a balancing payment higher up), and above all the question of which status you genuinely hold. If the relationship is really employment, the comparison is moot, because CIS would be false self-employment with the contractor carrying the back-dated bill. If you genuinely run your own business, CIS is usually the stronger route, and it opens further options in gross payment status and incorporation that PAYE never can.
Because the right answer turns on your actual numbers, your expenses, your status and what you value, it is worth modelling rather than guessing. You can run your own figures with our CIS versus PAYE comparison calculator, and our construction accounting services run the full comparison on your real income, deductions and working arrangements before recommending a route, then handle the refund, the filing and the compliance whichever way it goes. We work only in construction, so the CIS mechanics are the day job, not a sideline.