A CIS deduction is the amount a contractor withholds from a subcontractor's payment and passes directly to HMRC as an advance towards the subcontractor's income tax and National Insurance liability for the year.
The deduction is calculated on the labour element only. If a subcontractor's invoice is £1,200, made up of £800 labour and £400 materials, the deduction applies to the £800 figure, not the full £1,200. On a 20% deduction rate, the contractor pays the subcontractor £1,040 (£800 minus £160, plus the full £400 materials) and sends £160 to HMRC.
The deduction rate depends on the subcontractor's registration status in 2026/27:
- 0% for a subcontractor holding Gross Payment Status (paid in full, no deduction).
- 20% for a subcontractor who is registered with CIS.
- 30% for a subcontractor who is not registered with CIS.
The deduction is not a final tax charge. At the end of the tax year, the subcontractor declares their total income and expenses on a Self Assessment return (sole traders) or through Corporation Tax (limited companies). The CIS deductions already paid are set against the actual tax bill. Because expenses, personal allowances and the basic-rate band typically reduce the real liability below the amount deducted, most registered subcontractors receive a refund.
Contractors must record every deduction on a payment and deduction statement and include it in their monthly CIS300 return. Subcontractors should keep every statement they receive, as these are the evidence base for any refund claim. See CIS deduction rates explained and our CIS deduction calculator to see the arithmetic on your own figures.