Retentions are part of construction: CIS makes them more complicated
In most construction contracts, the contractor withholds a percentage of each payment (commonly 5%, sometimes 3% or 10%) as a financial guarantee against defects. That withheld amount is the retention. After the defects liability period expires, typically 6 to 18 months after practical completion, the contractor releases the retention and pays it to the subcontractor.
For most subcontractors this means money earned in one tax year arriving in a later tax year, with a CIS deduction taken at the point of release rather than at the point of invoicing. Understanding exactly when the deduction applies and when the income counts for tax is the difference between a clean set of accounts and a gap that HMRC might challenge.
When does the CIS deduction apply to a retention?
HMRC's CIS340 guidance is clear: there are no special rules for retention payments. They are treated exactly the same way as any other payment under CIS. The deduction obligation arises at the point the retention is paid to the subcontractor, not when the original invoice was raised.
In practice, this means:
- When you invoice for £10,000 of work and the contractor withholds 5% (£500) as a retention, the contractor deducts CIS from the £9,500 they pay immediately. No CIS deduction is taken on the £500 retention at that stage, because the £500 has not been paid.
- When the £500 retention is released (paid to you at the end of the defects liability period), the contractor takes a CIS deduction at the rate applicable on the date of that payment, based on your CIS registration status at that time.
- If you were registered at 20% when the original work was done and you are still registered at 20% when the retention is released, the deduction is 20% of the £500 labour element (after any material allocation). That is £100 deducted, £400 received.
This is straightforward in most cases. The complication arises when your CIS status changes between the original work and the retention release, or when a large number of retentions sit outstanding across multiple contracts and tax years.
Self Assessment: income is recognised when the retention is received
For your Self Assessment return, retention income is taxable in the year you receive it, not the year the underlying work was completed. Most sole-trader CIS subcontractors operate on the cash basis, which aligns with this treatment directly: money in is income in the year it arrives.
This timing matters significantly if you have large outstanding retentions. Work completed this tax year that will only be paid in 18 months' time is not income for this year's return. But equally, retentions received this year from work done in prior years are income for this year and must be included in your current return.
The contractor's deduction statement for each retention release is the document that evidences the retention as CIS income. Keep every deduction statement you receive and match it to your records. The CIS deductions on retention releases accumulate towards your total CIS deductions for the year, which you use to calculate your refund or offset against your tax bill.
Contractor obligations when releasing a retention
A contractor who releases a retention payment has the same CIS obligations as for any other payment to a subcontractor.
- Determine the correct deduction rate. Check the subcontractor's current CIS status. If you verified the subcontractor at the start of the contract but time has passed, check whether their status has changed. From 6 April 2026, re-verifying each subcontractor before payment is one of the three due-diligence steps required to protect your Gross Payment Status under Finance Act 2026.
- Apply the deduction to the labour element of the retention only. Materials are excluded from the CIS deduction base. If the retention covers both labour and materials, split the retention in the same proportion as the original contract or invoice. For a full worked example of how to split a payment between labour and materials, see our guide on CIS invoice splitting.
- Issue a payment and deduction statement. The contractor must provide this to the subcontractor within 14 days of making the retention payment. The statement must show the gross retention, the materials exclusion (if any), the deduction rate, and the net amount paid.
- Report the retention payment on the monthly CIS300 return. The retention is included in the CIS300 for the tax month in which it is paid. A tax month runs to the 5th, and the CIS300 is due by the 19th of the following month. See our guide to CIS contractor monthly responsibilities for the full return and deadline picture.
Deduction rates table for retention releases
| Subcontractor status at date of retention release | Deduction rate on labour element |
|---|---|
| Gross Payment Status (GPS) | 0% (full retention paid gross) |
| Registered subcontractor | 20% |
| Unregistered subcontractor | 30% |
Worked example: multiple retentions across tax years
A plastering subcontractor (registered, 20% rate) has five contracts in progress at 5 April 2027. Each contract holds a 5% retention. Here is their outstanding retention position:
| Contract | Original contract value (labour only) | 5% retention withheld | Expected release |
|---|---|---|---|
| Office refurbishment, Bristol | £12,000 | £600 | October 2027 |
| School extension, Bath | £18,000 | £900 | April 2028 |
| Retail fit-out, Cardiff | £8,000 | £400 | January 2028 |
| Housing development, Swindon | £22,000 | £1,100 | September 2027 |
| Industrial unit, Bristol | £6,000 | £300 | March 2028 |
| Total outstanding | £66,000 | £3,300 |
CIS deduction position at release (assuming 20% throughout):
| Tax year of release | Retentions released | Gross retention | CIS deduction (20%) | Net received |
|---|---|---|---|---|
| 2027/28 | Bristol office + Swindon housing | £1,700 | £340 | £1,360 |
| 2027/28 | (if Cardiff releases before 5 Apr 2028) | £400 | £80 | £320 |
| 2028/29 | School Bath + Industrial Bristol | £1,200 | £240 | £960 |
Each retention release increases the subcontractor's Self Assessment income in the year of receipt. The CIS deductions accumulate as advance tax payments, which reduce (or eliminate) the tax bill or generate a refund depending on the subcontractor's total income and expenses for the year.
The key planning point is that these retentions are not income until they are paid. But they must be tracked, because a retention released near the end of a tax year (March 2028, for example) still counts as income for that tax year even if the contractor's deduction statement arrives after 5 April. The date of payment is what matters for both CIS and Self Assessment purposes.
Record-keeping for outstanding retentions
Many CIS subcontractors undercount their income because they fail to track retentions systematically. The retention sits off the books until the cheque arrives, and sometimes even then it is not matched to the right tax year.
A simple retention register, even a spreadsheet, should record:
- Contract name and contractor details.
- Original contract value and the total retention withheld (both gross and net of any materials element).
- The tax year in which the retention was withheld (to confirm it was not included in income in that year).
- Expected release date and, once released, actual release date.
- CIS deduction statement reference and amount deducted.
- Net amount received and the tax year in which it was received.
Your accountant will need this register to complete your Self Assessment return accurately, particularly if retentions cross multiple tax years. Failing to declare a retention in the correct year is an error, but it is also straightforward to correct once identified. For detailed guidance on what records CIS subcontractors must keep and for how long, see our CIS record-keeping guide.
Retentions and Gross Payment Status
A subcontractor with Gross Payment Status (GPS) receives every payment, including retentions, at 0%. No deduction is taken by the contractor. The GPS holder accounts for the income through Self Assessment or Corporation Tax in the normal way.
GPS has cash flow implications for retention management. A GPS holder with £50,000 of outstanding retentions receives the full £50,000 when they are released, with no in-year deduction from the contractor. They then settle their tax through Self Assessment or Corporation Tax. For the cash flow benefits of GPS across the full income picture, see our guide to Gross Payment Status and cash flow.
Note that for GPS purposes, retentions received count as CIS income in the year of receipt, consistent with the general income-timing rules. If a large release year significantly increases your turnover, verify that you still meet the GPS compliance test for that year.
Using the CIS deduction calculator for retention amounts
Working out the deduction on a retention release follows the same logic as any CIS payment: identify the labour element, exclude any materials, apply the appropriate rate. If you want to check the arithmetic before payment, our CIS deduction calculator handles the calculation for any combination of labour, materials and deduction rate.
What happens to CIS retentions when you switch from sole trader to limited company?
If you change your trading structure, for example incorporating mid-career from a sole trader to a limited company, retentions owed to the old entity (you as a sole trader) remain payable to the old entity unless the contracts are formally novated to the company. CIS deduction statements issued by the contractor should name the correct entity, and the deduction statement for a retention release must match the entity that appears on the original contract.
For tax purposes, retentions do not transfer automatically on incorporation. A retention owed to you as a sole trader is still your personal income when it is released, even if you are now operating through a company. If you are planning to incorporate and have significant outstanding retentions, discuss the timing and mechanics with your accountant before you make the switch. The limited company's CIS refund route (via Employer Payment Summary in real time) is more efficient than the sole-trader Self Assessment route, but it only applies to the company's own CIS deductions, not to retentions that are legally owed to you personally.
Common retention errors and how to avoid them
- Including retentions as income before they are received. Retentions are not income until paid. Do not include them in your Self Assessment return until the money is in your bank account and the deduction statement has been issued.
- Failing to declare retentions in the year of receipt. Once the money arrives, it is income for that tax year. Do not defer it.
- Missing the deduction statement. If a contractor releases a retention without issuing a CIS deduction statement, contact them and ask for one. You cannot reconcile your CIS deductions accurately without it.
- Applying the wrong deduction rate. As a contractor, always check the subcontractor's current status before releasing a retention. Status can change: a subcontractor who was registered at 20% when the contract started may have become unregistered in the interim (suffering 30%) or may have obtained GPS (0%).
- Including materials in the deduction base. The 20% or 30% applies only to the labour element. If the retention covers both labour and materials, allocate proportionally.