CIS Deduction Rates (20%, 30%, 0%)

Key facts

20% — the standard rate for CIS-registered subcontractors.
30% — the higher rate applied to subcontractors who are not registered for CIS.
0% — for subcontractors with gross payment status, meaning no deduction is made.
Deductions apply to the labour element of payments — genuine materials costs are excluded.
The rate is determined by HMRC during the verification process, not chosen by the contractor.

The Three CIS Deduction Rates

Under CIS, contractors deduct a percentage from payments to subcontractors and send those deductions to HMRC. The rate applied depends on the subcontractor’s registration status, as confirmed by HMRC during the verification process:^[1]

Rate	Subcontractor Status	Typical Scenario
0%	Gross payment status (GPS)	Established subcontractor who has passed HMRC’s turnover, compliance, and business tests
20%	Registered for CIS	Subcontractor who has registered with HMRC for CIS
30%	Not registered (or unmatched)	Subcontractor who has not registered, or whose details cannot be matched by HMRC

How CIS Deductions Work

CIS deductions are calculated on the labour element of the payment, not the full invoice amount. The process is:^[1]

Start with the total payment to the subcontractor (excluding VAT)
Subtract any qualifying materials costs
Apply the appropriate deduction rate to the remaining amount (the labour element)
Pay the subcontractor the net amount (after deduction)
Send the deduction to HMRC

Worked Example: 20% Deduction

Item	Amount
Total payment to subcontractor (ex. VAT)	£5,000
Less: materials supplied by subcontractor	−£1,200
Labour element (subject to CIS)	£3,800
CIS deduction at 20%	−£760
Net payment to subcontractor	£4,240

The £760 deduction is sent to HMRC. The subcontractor receives £4,240 plus VAT (if VAT-registered). The £760 counts as an advance payment of the subcontractor’s tax liability.

Worked Example: 30% Deduction (Unregistered)

Item	Amount
Total payment to subcontractor (ex. VAT)	£5,000
Less: materials supplied by subcontractor	−£1,200
Labour element (subject to CIS)	£3,800
CIS deduction at 30%	−£1,140
Net payment to subcontractor	£3,860

The unregistered subcontractor receives £380 less than the registered subcontractor for the same work — a significant cash flow difference.

Tip: The difference between 20% and 30% on a £3,800 labour payment is £380. Over a year, for a subcontractor earning £50,000 from labour, the difference adds up to £5,000 in extra cash retained throughout the year. Registration is free — there is no reason not to register.

0% Rate: Gross Payment Status

Subcontractors with gross payment status receive their payments in full with no CIS deduction. To qualify, they must pass HMRC’s three tests:^[2]

Turnover test: Minimum £30,000 net construction turnover (individual) in the preceding 12 months
Compliance test: All tax returns filed on time, all tax paid on time
Business test: Business conducted through a UK bank account

See our detailed article on Gross Payment Status for full details on qualification and application.

VAT and CIS Deductions

CIS deductions are calculated on the payment amount excluding VAT. VAT is not subject to CIS and is dealt with separately through the normal VAT system:^[3]

If the subcontractor is VAT-registered, they charge VAT on their invoice in the normal way
The CIS deduction is calculated on the net (ex-VAT) amount after deducting materials
The contractor pays the VAT element in full to the subcontractor (no CIS deduction on VAT)
The contractor reclaims the input VAT through their own VAT return (if VAT-registered)

Note on domestic reverse charge: Since March 2021, the VAT domestic reverse charge for construction services applies to many CIS-regulated payments between VAT-registered businesses. Under the reverse charge, the customer (contractor) accounts for VAT instead of the supplier (subcontractor). This affects the VAT treatment but does not change how CIS deductions are calculated.

Payment and Deduction Statements

Every time a contractor makes a payment with a CIS deduction, they must provide the subcontractor with a payment and deduction statement. This must include:^[1]

The contractor’s name and HMRC employer reference
The subcontractor’s name and UTR
The tax month the payment relates to
The gross payment amount
The cost of materials (if applicable)
The CIS deduction amount
The net payment made to the subcontractor

Subcontractors need these statements to reclaim CIS deductions on their tax returns.

Frequently Asked Questions

What is the standard CIS deduction rate?

The standard rate is 20%, which applies to subcontractors who are registered with HMRC for CIS. The deduction is taken from the labour element of the payment (after deducting any qualifying materials costs).

Why is the unregistered rate higher at 30%?

The 30% rate is deliberately higher to encourage subcontractors to register for CIS. Registration is free and straightforward, and the higher rate acts as a financial incentive to get registered. Unregistered subcontractors suffer a significant cash flow disadvantage.

Do CIS deductions apply to materials?

No. CIS deductions only apply to the labour element of a payment. The cost of materials that the subcontractor has purchased for the work should be deducted before calculating the CIS deduction. However, the materials must be genuine and the subcontractor must have actually bought them.

Can I choose which deduction rate to apply?

No. The deduction rate is determined by HMRC when the contractor verifies the subcontractor. The contractor must apply whatever rate HMRC specifies. Using a different rate is a compliance failure.

Sources

CIS: deductions contractors must make — GOV.UK
Construction Industry Scheme (CIS) — GOV.UK
CIS: deductions (CISR15010) — HMRC