You've taken someone on to help with a job. They invoice you, you put them through the Construction Industry Scheme, you deduct 20%, and everyone's happy. Except HMRC might not be.
The hard truth is that paying someone under CIS does not make them self-employed. Employment status is decided by how the working relationship actually works, not by which scheme you run the money through. Get it wrong and you, the contractor, can be left paying the tax and National Insurance that should have come out of their wages, plus penalties.
This guide explains the difference between CIS and PAYE, the tests HMRC uses to decide status, and how to make the call with confidence. It's written for contractors, gangmasters and construction firms who engage labour, whether you're a sole trader with one regular helper or a limited company running a site.
What is the difference between CIS and PAYE?
CIS and PAYE are two different ways of handling tax on money you pay to someone who works for you. They are mutually exclusive: a payment falls under one or the other, never both at once.
PAYE (Pay As You Earn) is for employees. You run them through payroll, deduct Income Tax and Class 1 National Insurance from their wages, pay employer's National Insurance on top, and give them the rights that come with being employed (holiday pay, sick pay, pension auto-enrolment and so on).
CIS (the Construction Industry Scheme) is for self-employed subcontractors doing construction work. You deduct a flat percentage from the labour element of their invoice and pay it over to HMRC as an advance against their own tax and National Insurance. They sort out their final position through Self Assessment.
The key point is that the scheme follows the status. You don't choose CIS or PAYE as a matter of preference. You first work out whether the person is genuinely self-employed or actually an employee, and the correct scheme follows from that answer.
Does CIS decide employment status?
No. This is the single biggest misunderstanding in the trade.
HMRC is explicit that the Construction Industry Scheme applies only to workers who are self-employed in respect of the particular contract, and not to employees, who should be paid through PAYE. Being registered for CIS is not proof that someone is self-employed. The fact that a worker has been self-employed on previous jobs does not settle it either. What matters is the terms of the particular engagement in front of you.
In other words, you can have a CIS-registered subcontractor who, on the facts of how they work for you, is actually your employee. If that's the case, HMRC's view is that you should be operating PAYE on what you pay them, not running it through CIS.
So registering someone for CIS and deducting 20% does not protect you. It's the working relationship that counts.
What does HMRC look at to decide status?
There is no single rule. HMRC weighs up the whole picture of how the work is done. The factors below come straight from HMRC's employment status guidance.
Someone is more likely to be genuinely self-employed (so CIS can apply) if most of these are true:
- They bid or quote for work rather than being told what to do.
- They are not under direct supervision while working.
- They invoice for the work rather than being paid a regular wage.
- They are responsible for their own tax and National Insurance.
- They don't get holiday pay or sick pay.
- They can send a substitute to do the work in their place.
- They provide their own main tools and equipment.
- They run a business of their own and carry the risk of its profit or loss.
Someone is more likely to be an employee (so PAYE applies, not CIS) if most of these are true:
- A manager or supervisor decides what they do, when, and how.
- They have to do the work themselves and cannot send a substitute.
- They are expected to work a set number of hours and get paid for them.
- They work at your premises or a place you decide.
- You provide the materials, tools and equipment.
- They work for you and largely only you.
- They get holiday pay, sick pay or join your pension scheme.
In practice, the issues we most often see deciding it in construction are control (who decides how and when the work is done), substitution (could they genuinely send someone else), and mutuality of obligation (are you obliged to offer work and are they obliged to take it). A labourer who turns up when told, does what the foreman says, uses your kit and can't send a mate in their place is starting to look like an employee, however the invoices are worded.
If you want a documented view, HMRC's free Check Employment Status for Tax (CEST) tool lets you answer questions about the engagement and get a result. HMRC will stand behind a CEST result as long as the information is accurate and the answers reflect how the work is really done. It won't stand behind a result obtained from a contrived arrangement designed to get the answer you want.
If your contracts and day-to-day practice need a proper second opinion, that's the kind of judgement call our tax advisory team is built for.
What are the CIS deduction rates for 2025/26?
Once you've established that someone genuinely is a self-employed subcontractor, CIS sets the rate you deduct from the labour part of their payment.
| Subcontractor status | CIS deduction rate (2025/26) |
|---|---|
| Registered and verified with HMRC | 20% |
| Not registered for CIS | 30% |
| Holds gross payment status | 0% |
You apply the rate to the payment after stripping out the parts that aren't labour. To work out the deduction, start with the gross invoice and take off VAT and the cost of materials, consumable stores, fuel used (other than for travel), plant hire for the job, and any manufacturing or prefabricating materials the subcontractor paid for. You deduct CIS only from what's left.
These rates apply across England, Wales, Scotland and Northern Ireland, as CIS is a UK-wide scheme.
Illustrative example: the same worker under CIS and PAYE
Illustrative example. Tomasz, a bricklayer, invoices a main contractor £5,000 for a job: £4,000 of labour and £1,000 of materials he bought himself. He's registered for CIS, so the standard 20% rate applies.
The contractor deducts CIS only from the labour element:
- Gross invoice: £5,000
- Less materials (not subject to CIS): £1,000
- Amount CIS applies to: £4,000
- CIS deducted at 20%: £4,000 × 20% = £800
- Net paid to Tomasz: £5,000 − £800 = £4,200
The £800 goes to HMRC as an advance against Tomasz's own Income Tax and National Insurance. He settles up through Self Assessment, often reclaiming part of it if his allowances and expenses reduce the final bill.
Now suppose HMRC reviews the site and decides Tomasz was, on the facts, an employee for this contract: he worked set hours, took instructions from the site manager, used the firm's tools and couldn't send anyone in his place. The picture changes completely.
The contractor should have run him through PAYE. That means Income Tax and Class 1 employee National Insurance deducted from his wages, plus employer's National Insurance at 15% on earnings above the £5,000 Secondary Threshold for 2025/26, paid by the contractor on top. Crucially, that employer's National Insurance is the contractor's cost, not something you can claw back from the worker. The £800 already taken under CIS does not cover it, because CIS is only an advance against the worker's own liabilities, not the employer's.
That gap, the tax and employer's National Insurance that should have been operated through PAYE, is what HMRC comes after the contractor for if status was wrong.
What happens if you get employment status wrong?
If you treat an employee as a CIS subcontractor, the liability lands on you as the contractor, not the worker.
- You can be assessed for the PAYE that should have been operated, meaning the Income Tax and National Insurance that should have been deducted, plus employer's National Insurance on top.
- Penalties and interest can be added, and HMRC may treat the failure as careless or deliberate depending on the facts.
- HMRC's own guidance warns that as a CIS contractor you must check whether you should be employing the person instead of subcontracting, and that you may get a penalty if they should be an employee.
Employment law sits alongside all this. A worker found to be an employee may also have claims to holiday pay, unfair dismissal protection and pension auto-enrolment. Tax status and employment-law status are decided separately and don't always match, which is another reason to take the call seriously rather than assume CIS settles everything.
The reassuring part is that none of this is a trap for firms who get the basics right. Genuine subcontractors who run their own businesses, quote for jobs and carry their own risk belong in CIS, and that's perfectly proper. The problems come from labelling someone self-employed when, day to day, they're treated like staff.
How do you decide: a step-by-step check
Here's a practical sequence to run before you take someone on.
- Look at the actual working relationship, not the label. How will this person really work for you, day to day?
- Test control. Will you decide what they do, when and how? The more you direct it, the more it looks like employment.
- Test substitution. Could they genuinely send a qualified substitute in their place, and would you accept that? A real right of substitution points to self-employment.
- Test mutuality. Are you obliged to offer work and are they obliged to accept it, or is each job a separate arrangement?
- Check the practical signs. Who provides the tools and materials? Do they invoice or expect a regular wage? Do they get holiday or sick pay? Do they work for others too?
- Run CEST for a documented view and keep the result with the engagement papers.
- If it points to employment, set up PAYE. If it points to self-employment, verify them for CIS and apply the correct deduction rate.
- Keep records. Contracts, CEST outputs and verification details all help if HMRC ever asks how you reached your decision.
Get this right at the start and you avoid the expensive, retrospective version of the conversation later.
Frequently asked questions
Can a subcontractor be both CIS and PAYE with the same firm?
Yes, but for different work. A worker could be a genuine self-employed subcontractor on one contract and an employee on another with the same business, because status is decided contract by contract. Each engagement is judged on its own facts, so it's possible to run one relationship through CIS and a different one through PAYE.
Does being registered for CIS prove someone is self-employed?
No. HMRC is clear that CIS registration is not proof of self-employed status, and that a worker's previous self-employment is irrelevant to a new engagement. What decides it is how the particular job is actually worked, not whether the person holds a CIS registration.
Who pays the bill if HMRC says my subcontractor was really an employee?
The contractor does. If status was wrong, HMRC can assess you for the Income Tax and National Insurance that PAYE should have collected, plus employer's National Insurance, with penalties and interest possible on top. The CIS already deducted is only an advance against the worker's own tax, so it doesn't cover the employer costs.
What is the CIS deduction rate if a subcontractor isn't registered?
For 2025/26 the rate is 30% for an unregistered subcontractor, against 20% for one who is registered and verified, or 0% for one with gross payment status. The deduction applies only to the labour element after VAT and qualifying materials are taken out.
Do I have to use HMRC's CEST tool?
No, using CEST is not compulsory. It's a free tool that gives you a documented view of status for tax, and HMRC will stand by an accurate result. You can also reach a decision yourself based on the status factors, but keeping evidence of how you decided is sensible either way.
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Where Zmartly fits in
Construction payroll and CIS sit on a fault line, and the firms that stay out of trouble are the ones that get status right before the first invoice, not after an HMRC letter. If you're unsure whether a worker belongs under CIS or PAYE, or you want your contracts and processes reviewed, book a call with a Zmartly accountant. We work with CIS contractors and construction businesses every week, and we'll help you set it up so it holds up. Day-to-day, our bookkeeping service keeps your CIS deductions, verifications and records clean and HMRC-ready.
