CIS Deduction Rates: The Three Rates You Need to Know
Under the Construction Industry Scheme, contractors deduct money from subcontractor payments and pass it to HMRC. The amount deducted depends entirely on the subcontractor's registration status. There are three possible rates:
| Rate | Who It Applies To |
|---|---|
| 0% | Subcontractors with gross payment status |
| 20% | Registered CIS subcontractors |
| 30% | Unregistered subcontractors |
The 20% Rate: Standard for Registered Subcontractors
The 20% rate is the most common. It applies to any subcontractor who has registered with HMRC as a CIS subcontractor and whose registration the contractor has verified.
How the verification works: When you start working for a new contractor, they must verify you with HMRC before making the first payment. They do this using your UTR number (Unique Taxpayer Reference) and your National Insurance number (for sole traders) or company registration number (for limited companies). HMRC confirms your registration and tells the contractor to apply the 20% rate.
Example calculation at 20%:
- Labour: £3,000
- CIS deduction (20%): £600
- Net paid to you: £2,400
- HMRC receives: £600
The 30% Rate: For Unregistered Subcontractors
The 30% rate applies when a contractor cannot verify a subcontractor with HMRC — most commonly because the subcontractor is not registered for CIS.
HMRC uses the higher rate as an incentive to register. If you are working in construction and receiving payments subject to CIS, the 30% rate costs you significantly more in cash flow.
Example: 30% vs 20% on a £5,000 labour invoice:
- At 20%: you receive £4,000, HMRC gets £1,000
- At 30%: you receive £3,500, HMRC gets £1,500
The extra £500 held back under the 30% rate will eventually come back to you via your Self Assessment refund — but that could be months away. Registering for CIS costs nothing and takes 10 minutes. There is no reason not to do it.
When Else Does 30% Apply?
The 30% rate also applies when:
- A subcontractor cannot be matched in HMRC's database (name/UTR mismatch)
- The subcontractor's CIS registration has been cancelled by HMRC
- HMRC specifically tells the contractor to apply 30% (rare, usually a compliance issue)
The 0% Rate: Gross Payment Status
Gross payment status means no deduction is made — the subcontractor receives 100% of their invoiced labour amount. This is not automatic; it must be applied for and approved by HMRC.
How to Qualify for Gross Payment Status
HMRC applies three tests:
1. The Compliance Test All of the following must be fully up to date:
- Income tax and Self Assessment returns
- Corporation tax returns (if a company)
- PAYE returns
- VAT returns
- Payment of all tax due
Even one late return or payment in the previous 12 months can result in refusal.
2. The Business Test
- The business must have been carrying on construction work for at least 12 months
- The work must be done in the UK
- The business must be run through a bank account
3. The Turnover Test Minimum annual turnover thresholds (net of materials):
- Sole trader: £30,000
- Partnership: £30,000 per partner (up to £200,000 total)
- Company with up to 10 directors: £30,000 per director
- Company with more than 10 directors: £30,000 per director up to maximum of £100,000 plus £10,000 per additional director above 10
How to Apply
Apply online through the Government Gateway or by calling HMRC's CIS helpline (0300 200 3210). HMRC usually processes applications within 28 days.
Keeping Gross Payment Status
HMRC reviews gross payment status annually. If your compliance slips — even one late payment or return — HMRC can cancel your status. Losing gross payment status can seriously affect your cash flow.
Is Gross Payment Status Worth It?
For most established contractors with consistent turnover, yes. Not having 20% deducted from every invoice makes a real difference to working capital. You still pay the same total tax — you just manage your own payments quarterly via Self Assessment rather than having deductions made upfront.
What CIS Deductions Are Actually Deducted From
This is one of the most misunderstood aspects of CIS: deductions apply only to the labour element of an invoice, not materials.
If your invoice includes both labour and materials, the contractor should only deduct CIS from the labour portion.
Correct breakdown:
- Labour: £2,000 → CIS applies (20% = £400)
- Materials: £800 → no CIS deduction
- Net payable: £2,000 − £400 + £800 = £2,400
If you issue a labour-only invoice, CIS applies to the full amount. Always separate labour and materials on your invoice.
How CIS Deductions Affect Your Tax Return
CIS deductions are not a separate tax — they are advance payments. When you complete your Self Assessment tax return, you declare all your income and calculate your actual tax bill. CIS deductions you have suffered are then credited against your bill.
If deductions exceed your tax bill: HMRC refunds the difference. Many subcontractors receive refunds, particularly those with high material costs and business expenses.
If deductions are less than your tax bill: You pay the shortfall by 31 January following the tax year end.
Keep all your Payment and Deduction Statements (issued by contractors) as evidence of CIS deductions suffered. You will need these figures for your tax return.
Changing Your CIS Rate
You cannot directly choose your CIS rate — it is determined by your registration status. However, you can change it by:
- Registering with CIS (moves you from 30% to 20%)
- Applying for gross payment status (moves you from 20% to 0%)
FlashBill and CIS Deduction Rates
FlashBill stores the CIS rate against each client. When you create an invoice, the correct deduction is calculated automatically. Your invoice clearly shows the gross labour amount, the CIS deduction, and the net payable — exactly what HMRC requires. Try free →