The Construction Industry Scheme deducts tax from the labour portion of subcontractor payments at source. For most registered subcontractors the rate is 20 per cent. The deducted amount is paid to HMRC by the contractor and then reconciled through the subcontractor's Self Assessment tax return.
Because the 20 per cent is taken from every payment, not just once a year, most CIS subcontractors pay more tax during the year than they actually owe. The difference is refunded after Self Assessment is filed.
How the deduction base works
The CIS deduction is calculated on the labour element of the payment only. Materials, plant hire and VAT are excluded. If a payment covers both labour and materials, only the labour portion is subject to CIS deduction.
Example: a subcontractor invoices £10,000 for a job that includes £3,000 of materials. The deduction base is £7,000. At 20 per cent the contractor withholds £1,400 and passes it to HMRC. The subcontractor receives £8,600 plus the £3,000 materials recovery: £11,600 in total.
Registration rates
The rate applied depends on the subcontractor's registration status in the CIS:
- Gross payment status (GPS): 0 per cent deducted. Subcontractor receives the full payment.
- Registered subcontractor: 20 per cent deducted.
- Unregistered: 30 per cent deducted.
If you are registered and being deducted at 30 per cent, ask the contractor to verify your CIS status. The 30 per cent rate is applied when HMRC cannot confirm registration.
When a refund arises
Your Self Assessment return calculates your total tax liability for the year: income tax on your trading profit, plus Class 4 National Insurance contributions. The CIS deductions already paid are set against that liability. The difference is your refund or the balance owed.
For 2026/27: income tax at 20 per cent on profit up to £37,700 above the personal allowance of £12,570 (so up to £50,270 total), and 40 per cent above. Class 4 NI at 6 per cent between £12,570 and £50,270, and 2 per cent above.
Example: a subcontractor earns £45,000 gross, claims £5,000 in materials and £4,000 in genuine business expenses. Taxable profit is £36,000. Income tax: £4,686. Class 4 NI: £1,405.80. Total liability: £6,091.80. CIS deducted at 20 per cent on labour of £40,000: £8,000. Refund: £8,000 minus £6,091.80 = £1,908.20.
What counts as an allowable expense
You can deduct costs incurred wholly and exclusively for the trade. Common items include:
- Business mileage (55 pence per mile for cars from April 2026)
- Tools, equipment and consumables
- PPE and safety equipment
- Van running costs and insurance (or mileage rate)
- Accountancy and bookkeeping fees
- Mobile phone costs used for the business
- Protective clothing
Clothing that is not protective or uniformed is not allowable. Meals, unless on an overnight business stay, are not allowable. Capital purchases (plant, vehicles) are handled through capital allowances, not as direct expenses.
Materials in Self Assessment
Materials passed on to the client (bought specifically for the job and recharged at cost) can be deducted from gross income in your accounts. The result is the trading profit on which tax and NI are based.
How to claim
File a Self Assessment tax return by 31 January following the tax year. Your contractor should give you a CIS deduction statement (form CIS132 or an equivalent statement from their software) showing deductions made. Add the total deductions to the "tax deducted at source" section of the return.
HMRC issues refunds by bank transfer after processing. Simple returns with no unusual features are typically processed within a few weeks. Paper returns take longer.
Back years
You can claim a CIS refund for the previous four tax years. If you have never filed Self Assessment for years when CIS was deducted, you can register and file retrospectively. Interest is not paid on late claims but there is no penalty for late filing unless HMRC had already issued a notice to file.
Common mistakes
Missing expenses is the most frequent issue. Subcontractors who do not keep records often understate mileage, tools and phone costs, resulting in a smaller refund than they are entitled to. Using the Excel model alongside this guide and keeping receipts throughout the year reduces the risk.
Mixing materials and labour incorrectly also affects the deduction base calculation. If your contractor calculates the deduction on the full invoice, not just the labour element, you may have had too much withheld. The reconciliation in Self Assessment corrects this, but it is worth raising with the contractor directly.
Using the Excel model
The CIS refund and deduction model (included with this guide) lets you enter your gross income, materials, CIS rate, business expenses and any other income. The model computes the deduction base, the CIS deducted, your Self Assessment liability and the refund or balance. It uses 2026/27 rates and live formulas, so it updates as you change any input.
The model is a planning tool. The figures on your actual Self Assessment return will depend on the exact amounts on your CIS statements and any other income sources. Speak to a specialist if your position is complex, for example if you have employment income alongside your CIS work.