Construction payroll is genuinely fiddly. It runs standard PAYE for employees alongside the Construction Industry Scheme (CIS) for subcontractors, and the two have to work together cleanly, every month, without slip-ups.
Miss a monthly CIS return, and your client picks up a £100 penalty straight away. Pay a subcontractor before verifying them, and the deduction rate defaults to 30% rather than 20%. Get the labour and materials split wrong, and you're over or under-deducting in a way HMRC will eventually query.
If you look after construction clients, CIS is one of the higher-risk parts of the job. This guide walks through what construction payroll involves, what's changing from 6 April 2026, what it costs, and how to set your practice up for clean compliance. The figures here are for the 2025/26 tax year unless we say otherwise.
What are construction payroll services?
Construction payroll services manage the two payroll obligations most construction businesses run at once.
The first is standard PAYE for directly employed workers. That means Real Time Information (RTI) submissions to HMRC, payslips, statutory payments such as SSP and SMP, and year-end processing including P60s and P45s.
The second is CIS for subcontractors. A business that pays subcontractors for construction work has to register as a CIS contractor, verify each subcontractor before paying them, deduct the right amount, and file a monthly CIS return.
Running both cleanly takes time, and it's one of the areas where practices most often bring in a specialist rather than doing everything in-house. If your client base includes building firms, our construction accounting support is built around exactly this combination.
What are the CIS rules and deadlines?
The core CIS framework has been stable for years. Here's the part you and your clients deal with every month.
Any business that pays subcontractors for construction work must register as a CIS contractor with HMRC. Before the first payment to a subcontractor, you verify them with HMRC to set their deduction rate.
The deduction rates are:
| Subcontractor status | CIS deduction rate |
|---|---|
| Verified and registered | 20% |
| Not registered or can't be verified | 30% |
| Holds gross payment status | 0% (paid gross) |
CIS is deducted from the labour element only. Materials, plant hire and VAT are excluded from the calculation, so recording labour and materials separately on every payment matters.
Monthly CIS returns must reach HMRC by the 19th of the month following the tax month the payments fall in. A return that's even one day late triggers an automatic £100 penalty, rising to £200 at two months and £300 (or 5% of the deductions, whichever is higher) at six months.
You also have to give each subcontractor a payment and deduction statement within 14 days of the end of the tax month.
There's one more trigger to watch. A business outside mainstream construction becomes a "deemed contractor" once its construction spend tops £3 million over a rolling 12-month period, and then has to operate CIS even though building work isn't its main activity.
What's changing from 6 April 2026?
A set of CIS administrative changes is proposed to take effect from 6 April 2026, set out in HMRC's consultation on simplifying the scheme (which ran 6 January to 3 February 2026 and followed the Autumn Budget 2025). The two points below come from that consultation; the third is a wider compliance trend worth flagging. Because these sit in a consultation on draft regulations, treat them as proposed rather than settled and check the final regulations before you advise.
Nil returns become a hard legal requirement, with full penalties restored. Under the current rules you already have to either file a nil return or tell HMRC about a period of inactivity when you've paid no subcontractors in a month. From 6 April 2026 this is being put on a firmer footing and the full late-filing penalty regime is being reinstated, which reduces the long-running disputes over erroneous nil-return penalties. In practice, the safe habit is the same as now: file a nil return, or notify inactivity (HMRC can mark the scheme inactive for up to six months), so a return is never simply missed.
Public sector payments come out of CIS. A new regulation removes payments to local authorities and certain public bodies from CIS entirely, replacing an older administrative concession. If a client subcontracts to these bodies, that strand of reporting falls away.
Gross payment status remains under closer compliance scrutiny. Separately from the 2026 simplification consultation, HMRC has tightened the gross payment status regime in recent years and continues to police it hard, including the compliance tests a business must keep passing to retain GPS. This is not part of the 6 April 2026 consultation changes above, but if any of your clients hold gross payment status it is worth reviewing their compliance position regularly, since losing GPS moves them to deduction at source. Check current gov.uk guidance for the latest GPS rules before you advise.
What does a full construction payroll service cover?
Whether you run it yourself or review a provider's offering, a complete construction payroll service should cover:
- Contractor registration and subcontractor verification with HMRC before the first payment
- Monthly CIS return preparation and submission by the 19th
- PAYE and RTI runs, including payslips for directly employed staff
- Statutory payment calculations (SSP, SMP, SPP)
- Employer Payment Summary (EPS) filings where relevant
- P45s for leavers and P60s at year-end
- CIS deduction statements to subcontractors within 14 days of each tax month-end
- CIS reclaims where a subcontractor's deductions exceed their tax liability
The reclaim piece is worth singling out. Lots of smaller subcontractors have more CIS taken off during the year than their actual tax bill warrants. Spotting and reclaiming that excess is a genuine value-add, and clients notice it.
How much does construction payroll cost in 2026?
Pricing depends on the number of employees, the volume of subcontractors, and whether year-end work and reclaims are included. The ranges below are indicative market pricing, not a Zmartly quote, so always price against a specific client's volumes.
| Service type | Typical monthly cost | Notes |
|---|---|---|
| Basic CIS return only | £20 to £50 | Low-volume contractors with few subcontractors |
| Full CIS plus payroll (up to 10 staff) | £80 to £200 | RTI, payslips and CIS returns |
| Per-subcontractor add-on | £5 to £15 | Verification and monthly deduction statements |
| Full outsourced package | £150 to £400 | Includes year-end processing and CIS reclaims |
For most practices, the tidiest approach is bundling construction payroll with cloud bookkeeping into one monthly fee. It cuts double data entry and gives the client a single point of contact. Our bookkeeping services are set up to sit alongside CIS in exactly this way.
Should you handle CIS in-house or outsource it?
This question comes up the moment a practice picks up a few construction clients. The honest answer turns on your team's bandwidth and how confident they are with CIS.
In-house needs someone who's comfortable with verification, understands the labour-versus-materials split, and hits the 19th every single month. It also means staying current with rule changes like the April 2026 updates and having software that files returns directly.
Outsourcing cuts penalty risk. A specialist knows the rules cold, has systems built for CIS, and carries its own professional liability. The fee (typically £80 to £400 a month depending on volume) is a deductible business expense for the client, and it frees your team for advisory work.
Most practices we see land on a hybrid: a specialist handles the CIS processing and RTI filings, while the practice keeps oversight and the client relationship. That's usually the best balance of cost, risk and quality.
How does software fit into construction payroll?
The cleanest construction payroll setups run on MTD-compatible cloud accounting software, with the payroll and CIS modules connected to the same set of books.
Done well, that means CIS deductions are tagged as payments go through, monthly returns file straight to HMRC, and the bank feed reconciles subcontractor payments without manual matching. Several mainstream UK platforms support CIS within their payroll modules; the right choice depends on the client's size and how complex their payroll is. Feature sets change between releases, so confirm a platform's current CIS capability before you commit a client to it.
For a hybrid business, say a contractor who also sells tools online, the real win is that ecommerce income, payroll costs and CIS all flow into one set of accounts. VAT, corporation tax and CIS reclaims can then be managed together, which makes year-end far cleaner.
An accountant's CIS compliance checklist
A working reference for each construction client:
- Confirm contractor registration with HMRC before the first CIS payment
- Verify every subcontractor through HMRC before their first payment, and recheck at the start of each tax year
- Record labour and materials separately on every payment (only labour attracts CIS)
- File the monthly return by the 19th, and make sure payment reaches HMRC by the 22nd if paying electronically (the 19th if paying by post)
- File a nil return, or notify a period of inactivity, for any month with no subcontractor payments
- Issue CIS deduction statements within 14 days of each tax month-end
- Keep full digital records, in line with Making Tax Digital
- Review gross payment status for each subcontractor annually and flag any concerns before renewal
What are the reclaim benefits of CIS?
CIS deductions aren't money that vanishes. They're advance tax payments, which is worth spelling out to clients who see them only as a cash-flow drag.
For subcontractors, the deductions taken during the year are credited against the final tax bill. Where deductions exceed what's owed (common for lower-earning subcontractors), the excess is refunded. A good service spots this at year-end and files the reclaim promptly, which lifts the subcontractor's cash position.
For contractors, payroll and outsourced CIS service fees are fully deductible against taxable profits, whether the business trades as a sole trader or a limited company. For a company paying the corporation tax main rate of 25% in FY2025, a £250 monthly fee (£3,000 a year) reduces the corporation tax bill by £750. Companies with profits up to £50,000 pay the 19% small profits rate, and those between £50,000 and £250,000 get marginal relief, so the cash saving depends on where the client sits.
That's one of the most practical conversations you can have with a construction client: not just what CIS compliance costs, but what it costs after tax, and what you've reclaimed for their subcontractors this year.
Illustrative example. A small limited company doing domestic extensions employs two labourers and uses five regular subcontractors. It had been running CIS on a spreadsheet, filing late, and had picked up two £100 penalties. After moving to an outsourced service integrated with cloud software, returns went in on time, verification was handled at the start of each relationship, and at year-end the practice reclaimed over-deducted CIS for two subcontractors. The service costs £140 a month (£1,680 a year); at the 25% main rate that's a £420 corporation tax saving, so the net cost is roughly £105 a month. Figures are illustrative and will vary with each client's profits and rate band.
Get help with construction payroll and CIS
If CIS and construction payroll are eating into time you'd rather spend on advisory work, we can take the monthly processing off your plate while you keep the client relationship. Book a free 20-minute call with a Zmartly accountant to talk through your construction clients on our construction accounting page.
FAQs
What is the monthly CIS return deadline?
The 19th of the month following the tax month the payments fall in. Payment to HMRC is due by the 22nd if you pay electronically, or the 19th if you pay by post. Missing the return deadline, even by a day, triggers an automatic £100 penalty.
Do you have to file a CIS return if no payments were made that month?
Yes. You must either file a nil return or tell HMRC about a period of inactivity (which can be set for up to six months). From 6 April 2026 this requirement is being put on a firmer legal footing and the full late-filing penalty regime is being restored.
What deduction rate applies if a subcontractor can't be verified?
30%. If HMRC can't verify a subcontractor, because they're not registered or their details don't match, you deduct 30% from the labour element. That's well above the 20% standard rate, so verifying before the first payment is essential.
Are construction payroll service fees tax-deductible?
Yes. Outsourced payroll and CIS fees are fully allowable for both sole traders and limited companies. For a company at the 25% corporation tax main rate, a £200 monthly fee (£2,400 a year) reduces the corporation tax bill by £600. Companies on the 19% small profits rate or in marginal relief will save less.
What are the main CIS changes from 6 April 2026?
The two changes in HMRC's 2026 simplification consultation are: nil returns become a firm legal requirement with the full penalty regime restored, and payments to local authorities and certain public bodies come out of CIS. Both are proposed from 6 April 2026, so treat them as proposed and check the final regulations before advising. Separately, gross payment status stays under close HMRC scrutiny, but that is not part of the 2026 consultation changes.
Does a business with an online ecommerce element still need to comply with CIS?
Yes, if it carries out construction operations or spends more than £3 million a year on construction work (the deemed contractor threshold). The ecommerce side doesn't change the CIS obligation; what matters is whether the business pays subcontractors for construction work.
