Why is tax coming off my invoices before I've even done my tax return?
If you work in construction as a self-employed subcontractor, you've probably noticed your contractor doesn't pay you the full amount you invoice. They hold some back and send it to HMRC on your behalf. That's the Construction Industry Scheme, or CIS — a system where the contractor deducts tax at source from a subcontractor's labour and passes it straight to HMRC.
It's not an extra tax. It's an advance payment towards your eventual Self Assessment bill. The problem is the rate: it's a flat 20% or 30%, applied before any of your allowances or expenses are taken into account — which is why huge numbers of subbies end up overpaying and are owed a refund. Below, we explain the two rates, how to register for the lower one, and exactly how to get your money back.
What this guide covers
- What CIS is and why deductions come off your pay
- The 20% vs 30% difference and how to get the lower rate
- How to register as a subcontractor with HMRC
- How to reclaim overpaid CIS tax through Self Assessment
How CIS actually works
Under CIS, a contractor (the business paying you) must deduct money from the labour part of your payments and hand it to HMRC. As the subcontractor, you receive the rest. The deduction only applies to labour — the cost of materials you've supplied is excluded — so a proper invoice that splits out materials matters, because you don't want tax deducted on your material costs.
The rate depends entirely on whether you're registered:
- 20% if you're registered with HMRC as a CIS subcontractor.
- 30% if you're not registered.
- 0% (gross payment) if you qualify for gross payment status — HMRC pays you in full and you settle everything through Self Assessment. This has turnover and compliance conditions and is worth exploring once you're established.
The 10% that's just leaking away. The only difference between 20% and 30% is registration. If you're unregistered, an extra 10% of your labour is being held by HMRC for no reason other than paperwork you haven't done. On £30,000 of labour that's £3,000 tied up until you file your return. Registering is free and quick — do it.
How to register as a subcontractor
To register for CIS you first need to be set up as self-employed with HMRC (registered for Self Assessment). Then you register for CIS as a subcontractor, either online through your HMRC account or by phone. You'll need your Unique Taxpayer Reference (UTR) and National Insurance number. Once you're registered, tell your contractors so they can verify you and apply the 20% rate instead of 30%.
If you've not yet registered as self-employed at all, start there — our guide to the self-employed tax-deadline calendar covers the registration deadline and the dates that follow.
Why subcontractors almost always overpay
Here's the crux. CIS deducts a flat 20% from your labour with no regard for your personal allowance or your expenses. But when you do your actual tax return:
- Your first £12,570 of income is tax-free (personal allowance).
- You deduct your genuine business expenses — tools, materials, van running costs, protective gear, insurance — before tax is even calculated.
- Your real income tax and Class 4 National Insurance are then worked out on your profit, not your turnover.
Because 20% has already been taken off the top with none of that factored in, most subcontractors have paid HMRC far more than they owe by the time the year ends. That difference is a refund waiting to be claimed.
Worked example. Say over the year you're paid £40,000 of labour, all under CIS at 20% — so £8,000 has already gone to HMRC. Your allowable expenses (van, fuel, tools, insurance) come to £8,000, leaving £32,000 profit. Knock off the £12,570 personal allowance and you're taxed on roughly £19,430. At 20% income tax that's about £3,886, plus some Class 4 NI. Even after NI, the tax due is well under the £8,000 already deducted — so you'd be looking at a sizeable refund. Every subbie's numbers differ, but this pattern is the norm, not the exception.
How to reclaim overpaid CIS tax
You reclaim through your Self Assessment tax return. On the return you declare your full income, your CIS deductions already taken, and your expenses. HMRC nets it all off: if the CIS deducted is more than your final bill, you're due a refund; if it's less, you pay the difference.
To do this cleanly you need to keep every CIS payment and deduction statement your contractors give you (they must provide one for each payment). Those statements are your proof of the tax already paid. Keep them safe all year — chasing missing statements the following January is nobody's idea of fun.
Records to keep all year
- Every CIS deduction statement from every contractor.
- All invoices you've raised (with materials shown separately from labour).
- Receipts for expenses — tools, materials, fuel, van costs, workwear, insurance.
- Bank records showing what actually landed in your account.
Get those in order and your return is straightforward and your refund lands faster. Leave it in a carrier bag until January and it's stressful and easy to under-claim.
CIS refunds are one of the most commonly under-claimed things in the whole self-employed world, simply because people don't record expenses or don't realise how much they've overpaid. If you'd rather someone made sure you're claiming everything you're entitled to and getting the full refund back, get started with us — this is bread-and-butter work for us and it usually pays for itself.
