Xero and CIS: what the plan pages do not make obvious
Xero is one of the UK's most widely used cloud accounting packages and it handles CIS well, but there is a catch that many users do not notice until they try to file their first monthly return: the ability to calculate CIS deductions is included on all plans, but the ability to submit the CIS300 to HMRC is not. That requires a separate £5 a month add-on, regardless of which plan you are on.
For a subcontractor who only receives CIS deductions, this does not matter: you do not file CIS300 returns, so you never need the add-on. For a main contractor or any business that files monthly CIS300 returns, the add-on is unavoidable, and factoring it into the cost comparison is essential before committing to Xero over QuickBooks or Sage.
This guide works through Xero's CIS features, the current UK plan pricing (verified June 2026), how to set up CIS in Xero step by step, what it does well, what it does not handle, and how it compares with QuickBooks for CIS-specific work. It links into the full software comparison at best CIS accounting software 2026/27.
Xero UK pricing: current plans (checked June 2026)
Xero's UK plan structure changed in September 2024 when the old Starter, Standard and Premium plans were replaced. The current four plans and their monthly prices excluding VAT are shown below.
| Plan | Monthly price (excl. VAT, checked June 2026) | CIS deduction calculations | CIS300 HMRC filing | MTD ITSA (sole trader) |
|---|---|---|---|---|
| Ignite | £16 | Yes | Add-on: £5/mo | No |
| Grow | £33 | Yes | Add-on: £5/mo | Yes |
| Comprehensive | £47 | Yes | Add-on: £5/mo | Yes |
| Ultimate | £59 | Yes | Add-on: £5/mo | Yes |
The CIS add-on at £5 a month enables three things that are not available without it: direct CIS300 filing to HMRC, subcontractor verification within Xero, and bulk emailing of CIS deduction statements to subcontractors. The add-on applies to all plans equally, so there is no benefit to being on a higher plan if filing the CIS300 is your main requirement.
Payroll is not included in any Xero plan by default. It is available as a paid add-on billed per employee per month. If you need both CIS filing and payroll, the total Xero cost is the plan price plus the £5 CIS add-on plus the payroll add-on, which makes Sage Standard (£30/month with payroll and CIS included) look more competitive for employers.
What Xero does for CIS
CIS deduction calculations. On all four plans, Xero automatically calculates the correct CIS deduction when you mark a subcontractor as CIS and set their deduction rate. It applies the deduction to the labour element of the invoice and excludes materials, which is the correct treatment under the scheme. A £1,000 invoice split as £600 labour and £400 materials will have 20% applied to the £600 only, a deduction of £120, not £200. This labour-only deduction is one of the most commonly misunderstood aspects of CIS, and Xero handles it automatically once the invoice is coded correctly.
CIS300 return preparation and filing. With the £5/month add-on, Xero generates the CIS300 return from the subcontractor payments recorded during the tax month and submits it directly to HMRC. The return is due by the 19th of the following tax month, and from April 2026 contractors must also submit a nil return in any month with no subcontractor payments. Xero handles nil returns through the same CIS filing interface.
Subcontractor verification. With the add-on, Xero links to HMRC's verification service so you can verify a subcontractor's status (GPS, registered or unregistered) and record the resulting deduction rate without leaving the application. Verification before the first payment is a legal requirement under the scheme, and from April 2026 it is also one of the three due-diligence steps a contractor must take to meet the "knew or should have known" standard under Finance Act 2026.
Deduction statements. Xero generates the deduction statements that contractors must give subcontractors within 14 days of each payment. With the add-on, these can be bulk-emailed directly from Xero rather than downloaded and sent individually.
Domestic reverse charge VAT. Xero supports DRC VAT coding. When a VAT-registered subcontractor invoices a VAT-registered contractor for CIS-applicable services, the invoice is coded with the DRC VAT code. The guide to the domestic reverse charge in construction covers the five conditions that determine when DRC applies and how to set it up correctly.
Setting up CIS in Xero: step by step
The setup sequence below assumes you have an active Xero subscription and, where noted, the CIS add-on. It covers the main contractor role (paying subcontractors and filing CIS300 returns). If you are only a subcontractor receiving deductions, steps 4 and 5 are not relevant.
- Enable CIS in Xero settings. Go to Accounting, then Advanced, then Financial Settings. Under Construction Industry Scheme, enable CIS and enter your HMRC employer reference (your Contractor PAYE reference) and your UTR.
- Connect to HMRC (requires add-on). In the CIS settings, connect Xero to your HMRC Online account using your Government Gateway credentials. This enables verification and filing.
- Set up subcontractor contacts. For each subcontractor, open their contact record and enable the CIS subcontractor toggle. Enter their UTR. Once connected to HMRC, you can run the verification from this screen to confirm their deduction rate.
- Code invoices correctly. When you record a payment to a subcontractor, split the invoice lines between labour and materials. Xero applies the CIS deduction only to the labour lines, excluding materials. A standard tracking code for "CIS labour" on the applicable account code keeps the data clean for the monthly return.
- Set DRC VAT on applicable invoices. If you are VAT-registered and receive invoices from VAT-registered subcontractors under the DRC, code those invoices with the domestic reverse charge VAT code. Check whether all five DRC conditions are met before applying the code.
- File the monthly CIS300 (requires add-on). At the end of each tax month (the 5th), go to the CIS section in Xero, review the return for that month and submit it to HMRC. The deadline is the 19th of the following month. If no payments were made, file a nil return or pre-notify HMRC of inactivity.
Xero for CIS limited companies
A limited company subcontractor uses Xero for accounting, and may also need to handle the Employer Payment Summary (EPS) to reclaim CIS deductions suffered. The EPS is part of the payroll filing and offsets CIS the company has suffered against PAYE and NIC it owes HMRC, rather than waiting for a year-end refund. This in-year reclaim mechanism is covered in detail at CIS for limited companies: EPS reclaim.
Xero's payroll add-on supports EPS submissions, but payroll must be purchased separately. If you are a limited company using Xero for both accounting and the EPS, the total cost is the plan price (at least Grow if you want MTD ITSA) plus payroll plus the £5 CIS add-on if you also pay subcontractors yourself.
MTD ITSA on Xero: which plan you need
From April 2026, sole traders and partnerships with gross income over £50,000 must use MTD-compatible software for quarterly updates. The MTD threshold is tested on gross income before CIS deductions: a subcontractor on £60,000 gross who banks £48,000 after 20% CIS is tested on the £60,000 figure and is in scope from April 2026.
Xero supports MTD ITSA for sole traders on the Grow plan and above (£33/month, checked June 2026). The Ignite plan (£16/month) does not include sole-trader MTD ITSA filing. If you are a sole-trader subcontractor in scope from April 2026 and you use Xero, you need at least the Grow plan. If you also pay subcontractors and need CIS300 filing, add the £5/month add-on. The full MTD guide for CIS workers is at Making Tax Digital and CIS.
Xero vs QuickBooks for CIS: head-to-head
| Feature | Xero | QuickBooks |
|---|---|---|
| Entry plan price (checked June 2026) | £16 (Ignite) | £16 (Simple Start) |
| CIS deduction calculations included | Yes, all plans | Yes, Simple Start and above |
| CIS300 direct HMRC filing | £5/mo add-on required | Included at no extra cost |
| Subcontractor verification in-app | Yes (with add-on) | Yes (included) |
| Bulk deduction statements | Yes (with add-on) | Yes (included) |
| DRC VAT support | Yes | Yes |
| MTD ITSA (sole trader) | Grow plan and above only | Yes, included |
| Payroll | Paid add-on | Paid add-on |
| Phone support | No | No |
| Interface quality | Generally rated superior | Good, slightly denser |
The material differentiator is cost: a contractor on Xero Ignite plus the CIS add-on pays £21 a month (£16 plus £5), or £252 a year. A contractor on QuickBooks Simple Start pays £16 a month, or £192 a year, for the same filing capability. Over three years that is a £180 difference. Xero's advantage is interface quality, particularly for businesses that do a high volume of invoicing and bank reconciliation and value the cleaner user experience.
Honest limitations of Xero for CIS
The add-on is unavoidable for contractors. If you file CIS300 returns, you must purchase the add-on on top of your plan. There is no plan tier that includes CIS filing in the base price.
Ignite does not support MTD ITSA for sole traders. A sole trader in scope from April 2026 needs the Grow plan, doubling the plan cost from £16 to £33 a month before adding the CIS filing add-on.
Verification redirected in the past. Older versions of Xero redirected to the HMRC portal for verification. Current versions with the add-on complete verification within the application, but check that your Xero plan and add-on are both active if the in-app verification option is not visible.
Payroll is separate. Unlike Sage Standard, Xero does not include payroll in its plan price. A contractor who employs staff and pays CIS subcontractors will need the plan, the payroll add-on and the CIS add-on, which can add up quickly relative to Sage's all-in-one pricing.
Less specialised than Sage for large subcontractor networks. Sage 50cloud has more granular job-costing and subcontractor management tools for contractors handling 20 or more subcontractors simultaneously.
Best fit for Xero by entity type
Sole-trader subcontractor (receives deductions only, no CIS300 filing). Ignite at £16/month is sufficient if gross income is under £50,000. Grow at £33/month is required from April 2026 for sole traders over the £50,000 MTD threshold. No add-on needed.
Limited company subcontractor. Grow or Comprehensive, plus payroll add-on for EPS submissions. CIS add-on only if the company also pays its own subcontractors.
Contractor who pays subcontractors. Any plan plus the £5/month CIS add-on. Ignite plus add-on (£21/month) is the lowest-cost route for contractors without employees. Comprehensive or Ultimate if multi-currency or advanced analytics are needed.
The full breakdown of software options and how they compare across these scenarios is in the best CIS accounting software guide. For a quick view of your tax position, the CIS refund estimator gives a starting figure before you discuss your accounting setup.