The two most common ways to work in the construction industry are as a CIS self-employed subcontractor and as a PAYE employee. The financial outcomes look similar from a gross earnings perspective but diverge significantly once tax, National Insurance and expenses are factored in.
The core difference
A CIS subcontractor files a Self Assessment tax return and pays income tax and Class 4 National Insurance on trading profit. An employee has income tax and Class 1 NI deducted through the payroll (PAYE). The rate structure differs:
- CIS (Class 4 NI): 6 per cent between £12,570 and £50,270, 2 per cent above
- PAYE (employee Class 1 NI): 8 per cent between £12,570 and £50,270, 2 per cent above
The lower NI rate on the CIS side is one reason the self-employed route can produce a higher take-home at similar gross earnings. But the comparison is not that simple.
Expenses: the subcontractor advantage
A CIS subcontractor can deduct genuine business expenses from their gross income before tax is calculated. Tools, mileage, PPE, van costs and similar items reduce taxable profit. An employee generally cannot deduct these costs against employment income (the employment expense rules are far stricter).
The higher the allowable expenses, the larger the take-home gap in favour of the CIS route at the same gross earnings figure. At low expenses levels, the PAYE route can produce a higher net result because the 8 per cent Class 1 rate difference is less significant than commonly assumed.
The 2026/27 rate structure
Both routes use the same income tax bands for 2026/27:
- Personal allowance: £12,570
- Basic rate 20 per cent: on income from £12,570 to £50,270
- Higher rate 40 per cent: on income above £50,270
On the CIS side, income tax is computed on trading profit (gross less materials and expenses). On the PAYE side, income tax is computed on gross employment income (no expense deduction in most cases).
Example at £45,000 gross
CIS subcontractor with £5,000 in allowable expenses: taxable profit = £40,000. Income tax £5,486. Class 4 NI £1,645.80. Take-home £32,868.20.
PAYE employee at the same gross earnings (no expense deduction): income tax £6,486. Employee Class 1 NI £2,594.40. Take-home £35,919.60.
At this illustration the PAYE employee takes home approximately £3,051 more. The reason: the expense saving on the CIS side (reducing taxable profit from £45,000 to £40,000) saves about £1,000 in tax, but the lower NI rate on the CIS side saves only about £949. The PAYE route benefits from the absence of the 20 per cent CIS advance deduction, which is eventually refunded but creates a timing lag.
The CIS advance and cash flow
The 20 per cent CIS deduction is taken from every payment throughout the year and reconciled through Self Assessment. For a subcontractor earning £45,000 with a 20 per cent deduction rate, the contractor withholds approximately £8,000 across the year (on the labour base). When the Self Assessment return is filed, HMRC refunds the difference between the CIS deducted and the actual liability.
This creates a timing gap: the subcontractor has effectively given HMRC an interest-free loan of roughly £1,908 for up to 22 months (if a contract starts in April and the refund is issued after the following January deadline). The PAYE worker has no equivalent lag.
The non-financial factors
Employment status carries significant non-financial consequences:
- PAYE employees have statutory rights: sick pay, holiday pay, minimum wage protection and redundancy pay.
- CIS subcontractors have none of these rights as a matter of law.
- A subcontractor without income protection insurance bears the full cost of illness or injury.
IR35 and disguised employment rules apply when a contractor arrangement in practice resembles employment. If HMRC determines the relationship is one of employment, the contractor bears additional tax and NI on the deemed employment income.
When CIS beats PAYE
The CIS route typically wins when allowable expenses are high, when gross earnings fall into the higher rate band (where the 40 per cent income tax applies and the Class 4 NI differential matters more), or when the subcontractor has gross payment status and receives the full payment without any advance deduction.
Using the Excel model
The CIS vs PAYE take-home model (included with this guide) lets you enter gross earnings, CIS expenses and the CIS deduction rate. The model calculates the take-home for both routes side by side, makes the rate-mix explicit (Class 4 at 6 per cent on the CIS side, Class 1 at 8 per cent on the PAYE side), and shows the difference. Live formulas update as you change inputs.
The model is a directional tool. It does not account for pension contributions, benefits in kind, multiple income sources or tax code variations. Speak to a specialist if your position has additional complexity.