CIS deduction rates for 2026/27: 20%, 30% and gross payment status explained

Under the Construction Industry Scheme (CIS), every payment a contractor makes to a subcontractor for construction work carries one of three deduction rates: 20%, 30% or 0%. Which rate applies is not the contractor’s choice — HMRC tells you when you verify the subcontractor. Getting the rate right, and applying it to the right part of the invoice, is the difference between a clean CIS300 monthly return and months of corrections.

This guide explains the three rates, walks through the arithmetic on real invoices, covers what does and does not count as materials, and sets out the tests for gross payment status. If you just want the numbers for a specific invoice, our free CIS deduction calculator does the arithmetic for you, including the materials split.

The three CIS deduction rates

Rate	Who it applies to	What the contractor does
20% (standard rate)	Subcontractors registered for CIS	Deducts 20% of the labour element and pays it to HMRC
30% (higher rate)	Subcontractors who are not registered, or whom HMRC cannot match when the contractor verifies them	Deducts 30% of the labour element and pays it to HMRC
0% (gross payment status)	Subcontractors HMRC has approved to be paid gross	Pays the full amount with no deduction — but still reports the payment on the CIS300

Two points worth stressing. First, the deduction is not an extra tax — it is an advance payment towards the subcontractor’s own Income Tax and National Insurance, which they set against their bill later. Second, even at 0% the payment must still appear on the monthly return: gross payment status removes the deduction, not the reporting.

How verification decides the rate

Before paying a new subcontractor for the first time, the contractor must verify them with HMRC. HMRC checks its records and responds with the rate to use:

• If the subcontractor is registered for CIS, HMRC confirms the 20% rate.
• If HMRC cannot match the details supplied — or the subcontractor has never registered — it instructs the contractor to deduct at 30% and issues a verification reference, which must be shown on the subcontractor’s payment and deduction statement.
• If the subcontractor holds gross payment status, HMRC confirms 0%.

You do not need to re-verify a subcontractor you have already included on a CIS300 in the current or previous two tax years. But the rate can change between engagements — HMRC can move a subcontractor from gross to 20%, or from 30% to 20% once they register — so treat the verification response, not habit, as the source of truth. Good CIS software verifies subcontractors electronically and stores the rate and reference against their record automatically.

The arithmetic: what the deduction actually applies to

The single most common CIS error is applying the percentage to the whole invoice. The deduction applies to the labour element only. The sequence is always the same:

1. Start with the gross amount charged for the work;
2. Exclude VAT — CIS is never calculated on VAT (and under the domestic reverse charge, many invoices between VAT-registered construction businesses show no VAT to begin with);
3. Subtract the cost of materials the subcontractor paid for directly;
4. Apply the subcontractor’s rate — 20%, 30% or 0% — to what remains.

Worked example: 20% (registered subcontractor)

A registered bricklayer invoices £2,400 excluding VAT, of which £600 is materials they bought for the job.

Step	Amount
Gross payment (ex VAT)	£2,400
Less materials	£600
Amount liable to deduction (labour)	£1,800
CIS deduction at 20%	£360
Paid to subcontractor	£2,040

The contractor pays £360 to HMRC, reports £2,400 gross, £600 materials and £360 deducted on the CIS300, and gives the bricklayer a statement showing the same figures.

Worked example: 30% (unverified or unregistered)

A groundworker who has never registered for CIS invoices £3,000 excluding VAT, including £900 of materials. HMRC cannot match them at verification, so the higher rate applies.

Step	Amount
Gross payment (ex VAT)	£3,000
Less materials	£900
Amount liable to deduction (labour)	£2,100
CIS deduction at 30%	£630
Paid to subcontractor	£2,370

Note what the higher rate costs the subcontractor in cash flow: £210 more withheld than a registered subcontractor on the identical invoice. Registering for CIS is free and moves them to 20% — for most subcontractors stuck on 30%, it is the single most valuable piece of admin they can do.

Worked example: 0% (gross payment status)

A steel-fixing company with gross payment status invoices £5,000 excluding VAT, including £1,200 of materials. The contractor verifies them, HMRC confirms gross status, and the contractor pays the full £5,000 with no deduction. The payment — gross amount and materials — still goes on the CIS300 for the month; the deduction column simply shows nil. The subcontractor then settles their own tax through Corporation Tax or Self Assessment in the normal way.

Want to check your own figures at each rate? Run them through our free CIS deduction calculator — it splits labour from materials and shows the deduction and net payment instantly.

What counts as materials

Because materials come off before the deduction is calculated, HMRC expects contractors to take reasonable care that the materials figure is genuine and not inflated. Broadly, the materials element is the direct cost the subcontractor actually incurred for that job. It can include:

• Building materials bought for the work — timber, cement, fixings, plasterboard and so on;
• Consumable stores and fuel used for plant and machinery (not fuel for travelling to site);
• Plant and equipment hired from a third party for the job;
• The cost of manufacturing or prefabricating materials off-site.

It does not include the subcontractor’s own labour, travel costs, subsistence, or a profit margin added on top of what the materials actually cost. If a subcontractor uses plant they already own, there is no hire cost to deduct. Where a materials figure looks out of proportion to the job, ask for evidence — if HMRC later finds the materials element was overstated, it is the contractor who under-deducted and the contractor who is pursued for the shortfall.

Gross payment status: the three tests

Gross payment status lets a subcontractor be paid with no deduction at all — full invoices in, tax settled through their own returns. For businesses with real turnover it is a significant cash-flow advantage, and HMRC guards it accordingly. To qualify, a subcontractor must pass all three tests:

Test	What HMRC checks
Business test	The business does construction work (or supplies labour for it) in the UK and is run through a bank account
Turnover test	Net construction turnover — ignoring VAT and the cost of materials — of at least £30,000 for a sole trader; at least £30,000 per partner or per director; or at least £100,000 for the whole partnership or company
Compliance test	Tax returns filed and tax paid on time in the review period, across the business’s obligations — with only limited allowance for minor lapses

Status is not permanent. HMRC reviews gross payment status annually, re-running the compliance test against the previous year. Late returns or late payments can see the status withdrawn — which drops the subcontractor back to 20% deductions and can seriously disrupt cash flow mid-contract. If you hold gross status, protecting your filing record is protecting your working capital.

Reporting deductions and getting them back

Every deduction made lives on two documents: the contractor’s CIS300 monthly return, which tells HMRC who was paid, the gross amount, the materials and the tax withheld; and the payment and deduction statement given to the subcontractor by the 19th of the month. Those statements are the subcontractor’s evidence for recovering the money, so the route back depends on how the business is set up:

• Sole traders and partners claim the deductions through Self Assessment. The CIS tax withheld during the year is set against the Income Tax and Class 4 National Insurance due on their return; if more was deducted than the final bill, HMRC refunds the difference.
• Limited companies recover deductions in-year through payroll. Each month, the company offsets the CIS deductions it has suffered against its PAYE, National Insurance and student loan liabilities by reporting them on an Employer Payment Summary (EPS). If deductions suffered exceed those liabilities across the year, the balance is reclaimed from HMRC after the tax year ends.

The offset only works if the records line up — which is why chasing missing or wrong payment and deduction statements matters, and why contractors who report accurate figures on time make life easier for every subcontractor on their books.

Applying the wrong rate: who carries the risk

It is worth being clear about where the liability sits, because it is not symmetrical. If a contractor deducts at 20% when HMRC’s verification response said 30% — or treats a subcontractor as gross without confirmation — the shortfall is the contractor’s debt. HMRC pursues the contractor for the tax that should have been withheld, and penalties and interest attach to the contractor’s record, not the subcontractor’s. Deducting too much causes the opposite problem: the subcontractor is out of pocket until their Self Assessment or company reclaim catches up, and the contractor faces the admin of correcting statements and returns.

Three habits keep the rate right in practice:

• Verify before the first payment, every time. A subcontractor telling you they are “registered” or “gross” is not confirmation — the verification response is.
• Record the verification reference against the subcontractor, and quote it on statements whenever the 30% rate applies.
• Re-check dormant relationships. If a subcontractor has not appeared on one of your returns in the current or previous two tax years, they must be verified again before you pay them.

Where software fits

Rate selection, verification references, materials splits, the monthly return, statements and the EPS offset are all mechanical once the data is in one place. Taxriva handles the full chain in a single cloud product: verify a subcontractor, record the invoice with its materials split, and the correct deduction, the CIS300 figures and the payment and deduction statement follow automatically — alongside the payroll FPS and EPS if you also employ staff. If you are weighing up options, our honest comparison of the best CIS payroll software for UK contractors covers the whole market.

Quick reference

• 20% — registered subcontractors; 30% — unregistered or unverified; 0% — gross payment status.
• Verification with HMRC determines the rate — never assume it.
• Deduct from labour only: exclude VAT, subtract genuine materials costs first.
• £2,400 invoice with £600 materials at 20% → £360 deducted, £2,040 paid.
• Gross status tests: business, turnover (£30,000 sole trader / £30,000 per partner or director / £100,000 whole firm), compliance — reviewed annually.
• Recovery: Self Assessment for sole traders and partners; EPS offset for limited companies.
• Check any invoice in seconds with the CIS deduction calculator.