CIS Payroll in 2026: A Practical Guide for UK Construction Firms
Updated: Oct 2
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme is a set of tax rules that applies specifically to the construction industry. Under CIS, contractors deduct money from subcontractors' payments and pass it directly to HMRC. The deductions count as advance payments towards the subcontractor's tax and National Insurance.
If your business carries out construction work and you pay subcontractors, you are a contractor and must register for CIS.
Who counts as a contractor?
You are a contractor if your business carries out construction work and pays subcontractors, or your business has spent more than £1,000,000 on construction operations in any rolling 3-year period.
Who counts as a subcontractor?
A subcontractor is anyone who carries out construction work for a contractor and is not treated as an employee for tax purposes. This includes self-employed sole traders, partnerships, companies, and labour-only subcontractors.
Subcontractors must register with HMRC to receive gross payments (with no CIS deductions) or net payments (with 20% or 30% deductions).
CIS deduction rates for 2026/27
Registered for gross payments: 0% (no deduction). Registered for net payments: 20%. Unregistered or HMRC cannot verify: 30%.
The 30% rate applies when HMRC cannot verify the subcontractor's details. Always verify subcontractors before their first payment.
National Minimum Wage and National Living Wage 2026/27
21 and over (National Living Wage): £12.71 per hour. 18-20: £10.85. Under 18: £8.00. Apprentice: £8.00.
If HMRC finds underpayment, you must pay arrears immediately. You may also face penalties of up to 200% of the underpayment and be publicly named.
Employment status: getting it right
One of the biggest risks in construction payroll is employment status. If you treat a worker as self-employed when they are actually an employee, you could face back-dated PAYE and National Insurance, penalties of up to 100% of the tax owed, and tribunal claims.
CIS verification: a step-by-step process
Collect the subcontractor's details: full name, UTR, National Insurance number
Verify with HMRC using the CIS online verification service
Record the result: gross (0%), standard (20%), or higher rate (30%)
Re-verify when HMRC notifies a status change
Keep records for at least 3 years
Monthly CIS returns
Contractors must submit a CIS return every month to HMRC by the 19th. Late returns attract a penalty of £100 immediately, with additional penalties after.
Five costly payroll mistakes construction firms make
1. Not verifying subcontractors before the first payment
If you pay without verifying, you must deduct at 30%. If you pay gross when tax should have been deducted, you become liable.
2. Treating workers as self-employed without checking employment status
Getting this wrong can cost tens of thousands in back-dated tax, penalties and tribunal claims.
3. Missing the monthly CIS return deadline
Even with no subcontractors, you must file a nil return. Missing it costs £100 immediately.
4. Not keeping accurate records of materials vs labour
CIS deductions only apply to labour costs, not materials. Always itemise separately.
5. Failing to pay the National Minimum Wage
If HMRC determines workers are employees, you will owe arrears plus penalties of up to 200%.
How The Payroll Lab can help
We specialise in payroll for UK construction businesses. We handle CIS registration and monthly returns, subcontractor verification, employment status assessments, PAYE for employees, NMW compliance checks, and pension auto-enrolment.
Our fixed monthly pricing means no surprises. Book a free call or call us on 020 4542 3391.
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