Calculate CIS deductions

As a CIS contractor, you must calculate and deduct tax from payments to subcontractors for construction work. The deduction is paid to HMRC on behalf of the subcontractor, who can offset it against their own tax liability.

Getting the calculation right is essential. Deducting too little means you may have to pay the difference yourself. Deducting too much creates problems for your subcontractors and your working relationships.

When you must make deductions

You must make CIS deductions whenever you pay a subcontractor for construction work, unless they have gross payment status. This applies to:

Payments for labour on construction projects
Payments to sole traders, partnerships, and limited companies
Each payment you make, not just the final invoice

Before making your first payment to any subcontractor, you must verify them with HMRC using the CIS online service. Verification tells you which deduction rate to apply.

Which deduction rate to apply

The deduction rate depends on the subcontractor's CIS registration status. HMRC tells you the rate when you verify the subcontractor:

CIS deduction rates 2025/26

Construction Industry Scheme deduction rates applied to subcontractor payments. Contractors must deduct tax at source based on the subcontractor's registration status. Rates are set by HMRC and apply UK-wide.

Registered subcontractor rate: 20%
Unregistered subcontractor rate: 30%
Gross payment status rate: 0% (no deductions)
Effective from: Current tax year 2025/26
Deduction basis: Labour element only (excluding VAT and materials)

When to apply each rate:

20% rate - Subcontractor is registered with HMRC for CIS but does not have gross payment status. This is the standard rate for most registered subcontractors.
30% rate - Subcontractor is not registered with HMRC, or their details cannot be verified. Always verify subcontractors before first payment.
0% rate (gross payment) - Subcontractor has been granted gross payment status by HMRC. They receive full payment and account for tax themselves via Self Assessment or Corporation Tax.

Important: Deductions are calculated on the labour element only. Exclude VAT and any materials the subcontractor has directly paid for.

What is the Construction Industry Scheme

CIS contractor - make deductions and pay subcontractors

How to treat materials costs

CIS deductions apply only to the labour element of the payment. You must exclude materials costs from the calculation before applying the deduction rate. This is a critical step that many contractors get wrong.

CIS materials deduction rules

Materials costs are excluded from CIS deductions. This snippet defines what qualifies as materials, what does not qualify, and how to evidence materials on invoices.

Materials costs are excluded from CIS deductions. When calculating CIS deductions, you deduct the cost of materials from the gross invoice amount before applying the deduction rate. This means subcontractors are not taxed on materials they purchase directly for the job.

The deduction applies only to the labour element of the payment, not materials provided by the subcontractor.

CIS deduction basis: Labour element only (after deducting materials and VAT)
Materials deduction: Subtract materials cost from gross amount before applying CIS rate
Evidence required: Receipts or invoices showing subcontractor paid for materials directly
No evidence available: Contractor must estimate reasonable cost of materials
Formula: CIS deduction = (Invoice - VAT - Materials) x Deduction rate

What counts as materials

The following items can be deducted as materials costs before calculating CIS deductions:

Building materials - bricks, cement, timber, plasterboard, tiles, pipes, cables
Consumable stores - nails, screws, fixings, sealants, adhesives
Plant hire with operator - crane hire where operator is included in the hire
Fuel for equipment - diesel or petrol for generators, compressors, site plant (not vehicle fuel for travel)
Items incorporated in the work - anything that becomes part of the finished construction

What does NOT count as materials

The following items cannot be deducted as materials and remain subject to CIS deductions:

Plant hire without operator - hire of excavators, scaffolding, generators without operator
Equipment purchase or hire - tools, ladders, PPE, power tools owned by subcontractor
Travel costs - fuel or expenses for travelling to and from site
Accommodation - lodging costs for workers
Scaffolding hire - unless the subcontractor is erecting or dismantling it
Professional services - design fees, consultancy, surveying

How to show materials on invoices

Subcontractors should clearly separate materials from labour on their invoices:

Show materials cost as a separate line item
Include "Materials" or "Cost of materials" label
Keep receipts or supplier invoices as evidence
Be prepared to provide evidence if contractor requests it

Contractor's responsibility: If the subcontractor does not provide evidence of materials costs, the contractor must make a reasonable estimate of the materials element. HMRC expects contractors to make genuine efforts to establish materials costs.

Step-by-step calculation process

Follow this process for every subcontractor payment. The deduction is calculated after excluding VAT and materials, then applied to the remaining labour element:

CIS deduction calculation process

Step-by-step process for calculating Construction Industry Scheme (CIS) deductions from subcontractor payments. This procedure is used identically across multiple guides covering CIS contractor obligations, subcontractor payments, and construction payroll. Includes worked example.

Contractors must calculate CIS deductions from every payment to subcontractors for construction work. The deduction is calculated on the labour element only, after excluding VAT and materials. The deduction rate depends on the subcontractor's CIS registration status.

You must verify each subcontractor with HMRC before their first payment to determine the correct deduction rate (0%, 20%, or 30%).

Step 1: Identify the gross payment amount – Start with the total invoice amount from the subcontractor. This is the gross amount before any deductions.
Step 2: Exclude VAT from the calculation – CIS deductions are calculated on the VAT-exclusive amount. Remove any VAT charged before proceeding with the calculation.
Step 3: Exclude materials cost (with evidence) – Deduct the cost of materials the subcontractor has paid for directly. You must obtain evidence of materials costs where possible.
Step 4: Apply the correct deduction rate – Multiply the labour element (after deducting VAT and materials) by the deduction rate confirmed when you verified the subcontractor.
Step 5: Calculate net payment to subcontractor – Calculate the amount to pay the subcontractor after deducting the CIS amount. Add back VAT if applicable.
Step 6: Record the deduction for monthly return – Keep accurate records of all CIS deductions for your monthly return to HMRC and for issuing payment and deduction statements.

CIS deduction formula

CIS deduction = (Invoice - VAT - Materials) x Deduction rate

Worked example

A registered subcontractor (20% rate) submits an invoice for plastering work:

Invoice total (excl VAT): 1,000
VAT at 20%: 200
Materials cost (with receipts): 200
Subcontractor status: Registered (20% deduction rate)

Step-by-step calculation

Gross amount (excl VAT): 1,000
Deduct materials: 1,000 - 200 = 800 (labour element)
Apply CIS rate (20%): 800 x 0.20 = 160
CIS deduction to pay HMRC: 160

Labour element: 800
CIS deduction (20%): 160
Net labour payment: 640
Materials (passed through): 200
VAT (passed through): 200
Total to subcontractor: 1,040
CIS to pay HMRC: 160
Total contractor outlay: 1,200

Key points

The subcontractor receives 1,040 (net labour 640 + materials 200 + VAT 200)
The contractor pays 160 to HMRC as CIS deduction
Total contractor outlay is 1,200 (1,040 to subcontractor + 160 to HMRC)
The subcontractor can offset the 160 CIS deduction against their tax liability

Related snippets

For deduction rates and materials rules, see:

cis_deduction_rates - Current deduction rates (0%, 20%, 30%)
cis_materials_treatment - What counts as materials and evidence requirements

CIS contractor - make deductions and pay subcontractors

Use the CIS online service

Additional worked example

Here is another example showing how the calculation works in practice:

Scenario: Unregistered subcontractor

An unregistered subcontractor (30% rate) submits an invoice for bricklaying:

Invoice total (excluding VAT): 2,500
VAT at 20%: 500
Materials (bricks, cement, mortar): 800

Calculation

Gross amount (excluding VAT): 2,500
Deduct materials: 2,500 - 800 = 1,700 (labour element)
Apply CIS rate (30%): 1,700 x 0.30 = 510
CIS deduction to pay HMRC: 510

Payment breakdown

Labour element	1,700
CIS deduction (30%)	510
Net labour payment	1,190
Materials (passed through)	800
VAT (passed through)	500
Total to subcontractor	2,490
CIS to HMRC	510
Total contractor outlay	3,000

Key point: The higher 30% rate for unregistered subcontractors significantly reduces their take-home pay. Encourage your subcontractors to register with CIS to benefit from the lower 20% rate.

Paying the subcontractor

After calculating the deduction, pay the subcontractor the net amount:

Net labour payment - the labour element minus the CIS deduction
Materials - passed through in full (not subject to CIS)
VAT - passed through in full (not subject to CIS)

The subcontractor receives less than their invoice amount because you have deducted tax on their behalf. They can offset these deductions against their own tax liability when they file their Self Assessment or Corporation Tax return.

Payment and deduction statement

You must give the subcontractor a written statement within 14 days of the end of each tax month showing:

Your name and employer PAYE reference
Tax month the payment relates to
Subcontractor's name and Unique Taxpayer Reference (UTR)
Gross amount of payment (before deduction)
Amount of any deduction
Amount of any materials cost

Subcontractors need this statement to reclaim their deductions from HMRC.

Reporting to HMRC

The deductions you make must be reported on your monthly CIS return and paid to HMRC:

Monthly CIS return (CIS300)

File by the 19th of each month following the tax month. For each subcontractor you paid, report:

Subcontractor name and UTR
Verification number from HMRC
Gross payment amount (before CIS deduction)
Materials cost deducted
CIS deduction amount

Payment to HMRC

Pay the total CIS deductions to HMRC by:

22nd of each month - for electronic payments
19th of each month - if paying by post

If you also run PAYE for employees, CIS deductions are paid together with PAYE and National Insurance using the same payment reference.

What if you get it wrong?

If you realise you have made an error:

Deducted too much - adjust on a later return or refund the subcontractor and adjust your return
Deducted too little - you may need to pay the shortfall to HMRC yourself
Applied wrong rate - correct future payments and consider whether adjustments are needed

Record keeping

Keep detailed records of all CIS calculations and payments for at least 3 years after the end of the tax year. Records should include:

Subcontractor invoices showing labour and materials breakdown
Evidence of materials costs (receipts, supplier invoices)
CIS deduction calculations for each payment
Verification numbers from HMRC
Copies of payment and deduction statements issued
Monthly CIS return submissions

HMRC can fine you up to 3,000 GBP if you cannot produce CIS records when asked.

Common mistakes to avoid

Deducting from the full invoice - always exclude VAT and genuine materials costs first
Accepting inflated materials claims - request evidence and make reasonable estimates
Using the wrong rate - always verify subcontractors before first payment and re-verify if needed
Forgetting to re-verify - you must re-verify if a subcontractor was not on your return in the current or last 2 tax years
Missing the payment deadline - set calendar reminders for the 19th/22nd of each month
Not issuing statements - subcontractors need payment and deduction statements to reclaim tax

Next steps

After calculating CIS deductions:

Pay the subcontractor - the net amount after deduction, plus materials and VAT
Issue a payment and deduction statement - within 14 days of tax month end
Record the details - for your monthly return and records
File your monthly CIS return - by the 19th of the following month
Pay HMRC - by the 22nd (electronic) or 19th (post)

Use the Construction Industry Scheme online

Related guides

Register as a CIS contractor - how to register with HMRC before using subcontractors
Verify a subcontractor's CIS status - how to verify subcontractors and get the correct deduction rate
Submit your CIS monthly return - step-by-step guide to filing CIS300 returns
Register as a CIS subcontractor - help your subcontractors register for the lower 20% rate
VAT reverse charge for construction - when VAT treatment changes for construction services

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Calculate CIS deductions

When you must make deductions

Which deduction rate to apply

How to treat materials costs

Step-by-step calculation process

Additional worked example

Scenario: Unregistered subcontractor

Calculation

Payment breakdown

Paying the subcontractor

Payment and deduction statement

Reporting to HMRC

Monthly CIS return (CIS300)

Payment to HMRC

What if you get it wrong?

Record keeping

Common mistakes to avoid

Next steps

Related guides

Compliance Assistant

🧪 Business Context Testing

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When you must make deductions

Which deduction rate to apply

How to treat materials costs

Step-by-step calculation process

Additional worked example

Scenario: Unregistered subcontractor

Calculation

Payment breakdown

Paying the subcontractor

Payment and deduction statement

Reporting to HMRC

Monthly CIS return (CIS300)

Payment to HMRC

What if you get it wrong?

Record keeping

Common mistakes to avoid

Next steps

Related guides

Related guides in Business Tax Overview

Business Context Testing

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