CIS deduction rates explained

The three rates at a glance

Whichever rate applies, it is only ever calculated on the labour part of the invoice — never on materials. We'll come to that, but it's the rule that catches people out, so keep it in mind throughout.

20% — registered and verified

This is the standard CIS rate. It applies to a subcontractor who has registered for the Construction Industry Scheme with HMRC and whom you have verifiedbefore paying. When you verify them, HMRC confirms they're registered and tells you to deduct at 20%, along with a verification number you keep for your records and the CIS300.

30% — unverified or unregistered

The higher 30% rate applies when a subcontractor is not registered for CIS, or when you can't verify them — for example because their details don't match HMRC's records. It's not a penalty so much as a default: until status is confirmed, HMRC wants more withheld. If the subcontractor registers and is then verified, the rate drops to 20% for future payments.

0% — gross payment status

Some subcontractors qualify for gross payment status, meaning you pay them in full with no deduction. They settle their own tax later through Self Assessment or Corporation Tax. To hold gross status a subcontractor must pass HMRC's tests — a turnover threshold, a clean compliance history, and running their business through a bank account. You still report the payment on your CIS300; the deduction is simply £0.

How verification sets the rate

You don't choose the rate — HMRC does, through verification. Before a subcontractor's first payment you verify them via HMRC's CIS service using their name, UTR and (for companies) company registration. HMRC returns:

• The rate to use — 20%, 30% or 0%.
• A verification number — which you record and quote.

Verifying matters because guessing 20% on an unverified subcontractor leaves you liable for the under-deduction. Once verified, you generally don't need to verify that subcontractor again unless you haven't paid them for a while.

The rule that catches everyone: labour only

The rate is applied to the labour element of the invoice only. These are always excluded from the figure you deduct from:

• Materials the subcontractor genuinely paid for.
• VAT on the invoice.
• Qualifying plant and equipment hire and certain consumables.

So you split the invoice into labour and exempt costs, apply the rate to the labour, and pay the exempt amounts across in full. The full mechanics are in the CIS deductions guide.

Worked examples

Take one invoice — £2,000 labour plus £500 materials — and see how each rate plays out on the labour figure:

In every row the £500 of materials is paid in full — the rate only ever bites on the £2,000 of labour. The subcontractor receives labour minus deduction, plus the materials. The deduction goes to HMRC and is reported on your CIS300.

Run your own figures: the free CIS calculator takes labour, materials and the rate and returns the deduction, net pay and the CIS300 figures — no sign-up needed.

Applying the right rate, every time

Getting the rate and the split right on every invoice — and recording the verification number against it — is exactly the repetitive, error-prone work that CISflow takes off your plate.

Forward a subcontractor invoice and CISflow extracts the CIS fields, including the labour/materials split and the deduction at the rate you confirm, then lays them out for you to review and approve before a clean CIS bill goes into Xero. You keep control of the rate; CISflow kills the typing.

It's live and in early access. Start free to try it on a real invoice, or read how to file a CIS return next.

This guide is general information on UK CIS, not tax advice. Always verify a subcontractor's status and rate with HMRC. CISflow is a data-entry tool, not an accountancy or tax service — you remain responsible for figures submitted to HMRC.