CIS deductions: why 20% comes off your invoice, and why it isn't a tax bill

The first CIS remittance is a bad afternoon. You invoiced £2,800, the payment lands at £2,400, and nothing on the remittance advice explains where the rest went in language that sounds like English.

It went to HMRC, and you'll get it back. That's the whole story — but two details inside it are worth knowing properly, because one of them costs money every month if you get it wrong.

What actually comes off

Under the Construction Industry Scheme, a contractor paying a subcontractor has to withhold a slice of the payment and hand it to HMRC. The rate depends on you, not on the job:

• 20% if you are registered under CIS.
• 30% if you're not — this is what HMRC returns when it cannot match you to a registration.
• 0% if you hold gross payment status, which has turnover and compliance tests to pass.

If you've never registered, that ten-point gap comes off every invoice you raise. On the £2,800 example below, registering is worth £200 — on that one invoice.

The rate only touches the labour

This is the detail that costs people money.

GOV.UK sets out what the contractor takes off the gross invoice before applying the percentage: VAT, consumable stores, fuel used on the job except for travelling, plant hire, and materials you paid for directly. Everything on that list is a cost being reimbursed. You've already bought it once, so there's no income there to tax.

Back to the £2,800: say £2,000 of labour and £800 of materials. At 20%, the deduction is £400 and you're paid £2,400. Run the rate across the whole invoice instead and it's £560. That extra £160 is your own money, sitting with HMRC until you file, for no reason at all.

How you wrote the invoice decides which of those two happens. One line saying "kitchen rewire — £2,800" gives the contractor nothing to work from, and a cautious contractor deducts from the lot. Two lines, labour and materials priced separately, and it comes out right without a phone call. Keep the receipts too: a contractor is entitled to ask for evidence of what you paid.

Put the labour and the materials into the CIS deduction calculator and it shows what gets held back, what lands in the bank, and what the mistake would have cost.

It isn't a tax on the job

The withheld money is an advance payment against the tax and National Insurance you will owe. It is not an extra charge, and it is not lost. A sole trader claims it on the Self Assessment return; a limited company sets it against the PAYE it pays over. If the deductions across the year come to more than the tax due, HMRC refunds the difference.

So the £400 isn't a 20% cut in what you earned. It's £400 of next January's tax bill, paid months early. You're lending HMRC money until you file, which is a real cost — but it's a timing problem, not a loss. Treat it as a cost and price it in, and you'll be dearer than the next subbie for nothing.

There's an upside to that timing. If most of your work is CIS, a good share of your tax is paid before you ever file, so the January bill is smaller than a non-CIS trader's. What it costs you is that every invoice lands a fifth lighter than it reads, so your buffer has to come from somewhere else.

What this doesn't cover

This is the subcontractor's side. The contractor's side — verifying subcontractors, filing a monthly return, keeping the records — is a much bigger job. If you start paying subbies yourself, that's the point to talk to an accountant.

The domestic reverse charge is a separate rule that often lands on the same invoice. If you're VAT registered and billing another construction business, you generally charge no VAT and say on the invoice that the customer accounts for it. CIS still comes off the labour underneath that. Both being true at once is normal, and it's why a CIS invoice looks unlike every other invoice you raise.

Getting it right without thinking about it

None of this is difficult. It's just easy to get wrong in a hurry, on a phone, at nine in the evening — and the mistake is silent, because an over-deduction looks exactly like a correct one on the remittance.

Which is the argument for letting the invoice carry the rule instead of your memory. In grafter.ly, labour and materials are separate lines and the deduction comes off the labour, with the reverse-charge wording added when it applies. The split is right by default, and the number on the remittance is the number you expected. How CIS works on an invoice.

Rates and the exclusions above checked against GOV.UK on 31 August 2026. This is general information, not tax advice — your accountant knows your circumstances.