CIS vs PAYE: Understanding the Difference

byDaniel Greenaway/Published:6th November 2025/inContractors, Employees, Running a business, Self Employed

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In the UK construction industry, two major tax systems determine how workers are paid and how HMRC collects tax: the Construction Industry Scheme (CIS) and Pay As You Earn (PAYE).

At first glance, these systems may seem similar, as both involve tax deductions made at source before workers receive payment. However, their purpose, scope, and legal responsibilities are very different. CIS is specifically designed to regulate payments between contractors and subcontractors in construction, whereas PAYE applies broadly to employees across all industries and sectors.

For contractors and subcontractors, understanding the difference between CIS and PAYE is crucial. Confusing the two can lead to serious compliance breaches, incorrect tax deductions, and disputes with HMRC – all of which can result in penalties or backdated tax liabilities.

What CIS vs PAYE Post Covers

What CIS is and who it applies to
What PAYE is and how it works
The key differences between CIS and PAYE
How to determine which system applies in different scenarios
Common mistakes businesses make when handling both systems

Hopefully by the end you will have a clearer, practical understanding of CIS vs PAYE, helping you stay compliant, avoid HMRC penalties, and ensure that workers are paid correctly and efficiently.

Tip: HMRC takes worker classification seriously. Treating someone as a subcontractor under CIS when they should be on PAYE (or vice versa) can result in hefty penalties, backdated tax bills, and reputational damage. Always seek professional accounting advice before deciding which system applies.

More information:
CIS guidance – GOV.UK | PAYE guidance – GOV.UK

What is CIS?

The Construction Industry Scheme (CIS) is a set of tax rules introduced by HMRC to regulate payments between contractors and subcontractors working in the UK construction sector. The primary purpose of the scheme is to ensure that tax is deducted at source and passed to HMRC before subcontractors receive payment.

In practice, this means that contractors are responsible for deducting tax from payments made to subcontractors and sending those deductions to HMRC on their behalf. This helps prevent tax evasion within the construction industry and ensures that subcontractors’ income is accurately reported.

How CIS Works

Contractors must deduct tax from payments made to subcontractors.
The deduction rate depends on the subcontractor’s registration status with HMRC:
- 20% – for registered subcontractors
- 30% – for unregistered subcontractors
- 0% – for subcontractors with Gross Payment Status (they receive full payment and handle their tax through Self Assessment or Corporation Tax).
Contractors must send the deducted amounts directly to HMRC each month, along with their monthly CIS return.

Subcontractors then report their earnings through a Self Assessment tax return (or a company return if trading as a limited company) to reconcile these deductions against their actual tax liability. In many cases, this process results in a tax refund, since CIS deductions can be higher than the final amount of tax due once allowable expenses are taken into account.

Expert insight: Many self-employed subcontractors overpay tax under CIS without realising it. If you work in construction, it’s worth reviewing your CIS deductions annually to ensure you’re reclaiming what you’re entitled to.

What Types of Work Does CIS Cover?

The Construction Industry Scheme (CIS) applies to most construction-related activities carried out within the UK. It covers a wide range of work on permanent and temporary buildings, civil engineering projects, and related site operations.

Work Covered by CIS

Building and civil engineering work
Demolition and dismantling
Repairs, alterations, and maintenance
Site preparation, groundwork, and access works
Installation of systems such as heating, lighting, power, ventilation, and water

Essentially, if the work involves the construction, alteration, repair, or demolition of a building or structure, it is likely to fall under CIS.

Exceptions to CIS

Not every service connected to the construction industry is covered by CIS. Certain professional and administrative roles are excluded, such as:

Architectural and surveying services
Scaffolding hire (without labour)
Carpet fitting
Material delivery and manufacture of building materials

These exceptions highlight the importance of understanding whether a particular activity counts as “construction work” under the scheme – getting this wrong can lead to HMRC compliance issues.

Tip: Contractors must register for CIS with HMRC before paying subcontractors. Subcontractors should also register to avoid the higher 30% deduction rate — registered subcontractors are only taxed at 20%.

More information: Construction Industry Scheme overview – GOV.UK

What is PAYE?

Pay As You Earn (PAYE) is the system used by HMRC to collect Income Tax and National Insurance contributions (NICs) directly from employees’ wages or salaries. It applies across all sectors of employment in the UK and is not specific to the construction industry.

PAYE ensures that tax and National Insurance are deducted at source, meaning before employees receive their pay and sent directly to HMRC by the employer. This system helps employees stay up to date with their tax payments throughout the year, reducing the need for end-of-year tax returns.

How PAYE Works

Employers deduct Income Tax and NICs from employees’ wages before payment.
Deductions are calculated using each employee’s tax code, which takes into account their personal allowance, taxable benefits, and any HMRC adjustments.
The employer sends the deducted amounts to HMRC, along with their own employer National Insurance contributions.
Employees usually do not need to complete a Self Assessment tax return unless they earn additional income (such as self-employment, property rental, or investment income).

Key Points About PAYE

PAYE is designed for employees, not self-employed subcontractors.
Unlike CIS, PAYE takes into account the employee’s personal allowance before tax is deducted reducing the likelihood of overpayment or tax refunds.
PAYE also covers National Insurance contributions (both employee and employer), which are not part of CIS deductions.

Example

For example, an employee earning £30,000 per year will have tax and National Insurance deducted automatically each month under PAYE. They receive their net pay after these deductions, and the employer sends the amounts due directly to HMRC. Unless they have other sources of income, the employee will not need to complete a Self Assessment tax return.

Tip: If you work in construction but are treated as an employee rather than a subcontractor, you should be on PAYE not CIS. Misclassification can create serious compliance problems for both the worker and the business, including penalties and backdated tax bills.

More information: PAYE for employers – GOV.UK

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CIS vs PAYE: Key Differences

Although both the Construction Industry Scheme (CIS) and Pay As You Earn (PAYE) involve tax being deducted at source, they operate under entirely different rules. Understanding these differences is essential for contractors, subcontractors, and employers to stay compliant with HMRC requirements.

The following table outlines the main distinctions between CIS and PAYE:

Feature	CIS	PAYE
Who it applies to	Subcontractors working in the UK construction industry	Employees across all sectors
Tax deducted	Flat rate: 20% (registered), 30% (unregistered), or 0% (Gross Payment Status)	Calculated using the employee’s tax code and allowances
Other deductions	No National Insurance deductions (subcontractors pay through Self Assessment)	Includes Income Tax and both employee & employer National Insurance contributions
Refunds	Common, as CIS deductions often exceed actual tax due once expenses are claimed	Less common, unless an employee’s tax code or deductions were incorrect
Filing requirement	Subcontractors must submit a Self Assessment or company tax return	Employees usually do not need to file a tax return unless they have additional income
Employment status	Self-employed subcontractor or limited company subcontractor	Employee under a contract of employment

In simple terms, CIS is for independent subcontractors who work for multiple contractors and handle their own tax affairs, while PAYE applies to employees with a fixed wage or salary who have their tax managed by their employer.

Expert insight: Determining whether a worker should be paid under CIS or PAYE depends on their employment status. Misclassification can lead to HMRC penalties, unpaid tax liabilities, and loss of Gross Payment Status – so it’s vital to assess each working relationship correctly.

How CIS and PAYE Affect Contractors

Contractors in the UK construction industry often have obligations under both the Construction Industry Scheme (CIS) and Pay As You Earn (PAYE). Understanding when each system applies and how they overlap is critical for maintaining compliance with HMRC regulations.

CIS Responsibilities

Under the Construction Industry Scheme, contractors must:

Deduct tax from payments made to subcontractors (at 20%, 30%, or 0% if the subcontractor has Gross Payment Status).
File monthly CIS returns with HMRC by the 19th of each month.
Provide each subcontractor with a CIS deduction statement detailing the tax withheld.
Pay the deducted amounts directly to HMRC.

PAYE Responsibilities

Contractors who employ workers directly such as site managers, office staff, or labourers on payroll must also operate a PAYE system. This involves:

Deducting Income Tax and National Insurance contributions (NICs) from employees’ wages.
Calculating deductions based on each employee’s tax code.
Submitting Real Time Information (RTI) reports to HMRC every time employees are paid.
Paying the deducted tax and NICs to HMRC monthly or quarterly, depending on payroll size.

Why Classification Matters

It’s vital to correctly determine whether a worker is an employee (PAYE) or a subcontractor (CIS). HMRC bases its assessment on the actual working relationship, not simply the contract wording.

Key factors HMRC considers include:

Control – Who decides how, when, and where the work is carried out?
Equipment – Does the worker provide their own tools or use the contractor’s equipment?
Financial risk – Does the worker bear any financial risk or have the right to send a substitute?

The Risk of Misclassification

If HMRC determines that a worker treated as a subcontractor should have been classed as an employee, the contractor may become liable for:

Unpaid Income Tax and National Insurance contributions
Interest on overdue payments
Financial penalties

Beyond financial costs, misclassification can damage a company’s reputation and lead to audits or the loss of Gross Payment Status.

Tip: Always keep clear written contracts and carry out formal employment status checks if you’re unsure. HMRC’s Check Employment Status for Tax (CEST) tool can help you determine the correct classification for each worker.

CIS vs PAYE for Subcontractors

If you are a subcontractor in the UK construction industry, the way you are paid and the tax you owe depends on whether you fall under the Construction Industry Scheme (CIS) or Pay As You Earn (PAYE). The two systems treat workers very differently in terms of tax deductions, responsibilities, and reporting requirements.

Working Under CIS

You are treated as self-employed.
Your contractor deducts 20% tax from your payments (or 30% if you are not registered with HMRC).
The contractor sends the deducted amount to HMRC on your behalf.
You receive the net payment and must complete a Self Assessment tax return each year to reconcile your CIS deductions against your actual tax liability.
This allows you to claim business expenses (such as tools, travel, or materials) and request a refund if you’ve overpaid tax.

Working Under PAYE

You are treated as an employee.
Your employer deducts Income Tax and National Insurance contributions (NICs) directly from your wages based on your tax code.
These deductions are automatically sent to HMRC through Real Time Information (RTI).
You generally do not need to complete a Self Assessment tax return unless you have additional income — for example, from self-employment, rental property, or investments.

Mixed Arrangements

Some subcontractors may work under both CIS and PAYE within the same tax year. For example, you could be employed full-time under PAYE while also taking on CIS subcontracting work for another contractor. This is common in the construction industry and perfectly acceptable but it adds reporting complexity.

In this situation, you must still file a Self Assessment tax return to declare your CIS income and expenses, as well as your PAYE employment income. HMRC will calculate your total tax position and issue a refund or bill if adjustments are required.

Tip: If you work under both CIS and PAYE in the same tax year, make sure your Self Assessment includes all sources of income. HMRC can issue penalties for under-reporting even if you’ve already had tax deducted through PAYE.

More information: CIS for subcontractors – GOV.UK | PAYE overview – GOV.UK

Common Mistakes When Mixing CIS and PAYE

Because CIS and PAYE often operate side by side in the UK construction sector, it’s easy for businesses to confuse their rules and responsibilities. Misunderstandings can lead to compliance breaches, penalties, and unnecessary tax bills. Below are the most frequent mistakes contractors and subcontractors make and how to avoid them.

Treating subcontractors as employees (or vice versa)
Misclassifying a worker can be extremely costly. If someone should be on PAYE but is paid as a subcontractor under CIS, HMRC may demand backdated Income Tax, National Insurance, and penalties.
Fix: Use HMRC’s free Check Employment Status for Tax (CEST) tool to confirm each worker’s correct employment status before setting up payments.
Forgetting that CIS does not include National Insurance contributions
CIS deductions only cover Income Tax — not National Insurance. Subcontractors must still pay Class 2 and Class 4 National Insurance through their annual Self Assessment.
Fix: Subcontractors should budget for NIC payments throughout the year. Contractors should also ensure their subcontractors understand this distinction to avoid confusion or shortfalls.
Failing to reconcile CIS deductions at year-end
Many subcontractors assume CIS deductions are final tax payments. In reality, these deductions must be reconciled against your actual income, expenses, and allowances in your annual Self Assessment (or Corporation Tax return for limited companies).
Fix: Keep every CIS deduction statement and submit your tax return on time to claim any refund due.
Contractors not registering for both CIS and PAYE when required
Some contractors register only for CIS but forget they must also operate PAYE if they employ any staff directly. This oversight can result in missed filings, penalties, and backdated tax liabilities.
Fix: If you pay both subcontractors and employees, ensure you’re registered for both CIS and PAYE with HMRC — and that each scheme is managed and reported separately.

Tip: Keep CIS and PAYE completely separate in your records. Treat them as two distinct systems with different rules, deadlines, and reporting obligations because that’s exactly how HMRC does.

Which is Better: CIS or PAYE?

There is no single answer to whether CIS or PAYE is “better.” The two systems serve very different purposes, and the right one depends entirely on your working status, responsibilities, and how you operate within the construction industry.

CIS (Construction Industry Scheme)
- Best suited to subcontractors who are genuinely self-employed.
- Offers greater flexibility – you can claim a wide range of business expenses such as tools, travel, insurance, and training to reduce your tax bill.
- Often results in a refund at year-end because CIS deductions are made before expenses and allowances are applied.
- However, it also comes with more responsibility – you must complete a Self Assessment tax return or company return, keep detailed records, and budget for Class 2 and Class 4 National Insurance contributions.
PAYE (Pay As You Earn)
- Best suited to workers employed by a company rather than self-employed subcontractors.
- Provides security and simplicity – Income Tax and National Insurance are automatically deducted by your employer and paid directly to HMRC.
- Removes the need to complete a Self Assessment tax return unless you have additional sources of income.
- However, PAYE employees cannot claim the same range of business expenses as CIS subcontractors.

The Bottom Line

The right system is not a personal choice – it depends on whether you are genuinely self-employed (CIS) or an employee (PAYE). HMRC assesses your working status based on the reality of the arrangement, not just what your contract states.

Getting this wrong can have serious consequences. Misclassification may lead to backdated tax bills, National Insurance liabilities, and penalties.

Tip: If you are unsure whether you should be paid under CIS or PAYE, use HMRC’s Check Employment Status for Tax (CEST) tool or speak with a qualified accountant who understands the construction industry.

Why Professional Advice Matters

The line between CIS and PAYE can sometimes be blurred. HMRC applies strict tests to determine whether someone is employed or self-employed, and even small mistakes in classification or reporting can be costly. Getting expert support ensures you stay on the right side of compliance while protecting your business from unexpected tax liabilities.

At Accounting Wise, we help contractors and subcontractors:

Register and remain fully compliant with CIS and PAYE rules
Prepare and file accurate CIS Returns and PAYE submissions to HMRC
Prevent worker misclassification and avoid HMRC penalties
Claim refunds efficiently and maximise overall tax savings

Our qualified accountants specialise in the construction industry and understand how to manage both systems effectively, giving you peace of mind that your obligations are met on time and correctly.

Final Thoughts on CIS vs PAYE

Understanding the difference between CIS vs PAYE is essential for anyone working in the UK construction sector. In short:

CIS applies to subcontractors – it regulates how contractors deduct and pay tax to HMRC.
PAYE applies to employees – it ensures that Income Tax and National Insurance are collected automatically through payroll.

Mixing them up can lead to fines, backdated tax demands, or missed refund opportunities. Getting it right protects your finances, reputation, and business compliance.

Need help with CIS vs PAYE compliance? Whether you’re a contractor managing both systems or a subcontractor unsure of your employment status, Accounting Wise can help you navigate the process with confidence.

Contact us today for expert guidance on CIS, PAYE, and construction tax compliance. Call 0330 113 8442 to get started.

Whether you work under CIS, PAYE, or as a self-employed professional, can help you stay compliant and maximise your tax efficiency.

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CIS vs PAYE FAQ

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Do I need to register for CIS if I’m self-employed in construction?

Yes. If you work as a self-employed subcontractor in the UK construction industry, you must register for CIS with HMRC. This ensures you’re taxed at the standard 20% rate instead of the higher 30% rate applied to unregistered subcontractors.

Can I be both CIS and PAYE at the same time?

Yes. Many workers in construction have mixed arrangements for example, being employed full-time under PAYE and also taking on CIS subcontracting work. You must still complete a Self Assessment tax return to declare your CIS income and expenses.

What’s the difference between a contractor and a subcontractor under CIS?

A contractor pays subcontractors for construction work and is responsible for deducting and reporting tax to HMRC. A subcontractor carries out work for a contractor and has tax deducted from their payments under the scheme.

Does CIS cover all types of construction work?

CIS applies to most construction work in the UK, including building, demolition, repairs, and site preparation. However, professional services such as architecture, surveying, and material supply are generally excluded. See full details on the GOV.UK CIS overview.

Do PAYE employees in construction need to file a tax return?

Usually not. PAYE employees have Income Tax and National Insurance automatically deducted by their employer. You only need to complete a tax return if you have additional income, such as CIS subcontracting work, self-employment, or property rental.

What happens if I use the wrong system (CIS or PAYE)?

If a worker is incorrectly classified for example, treated as a subcontractor when they should be on PAYE HMRC can demand backdated tax, National Insurance, and penalties. Always verify employment status using HMRC’s CEST tool or consult a qualified accountant.

How do I claim a CIS tax refund?

Subcontractors can claim a refund by filing their annual Self Assessment return or company return. The CIS deductions made by contractors are offset against your total tax liability, and HMRC issues a refund if you’ve overpaid.

Can Accounting Wise help with CIS and PAYE compliance?

Yes. Accounting Wise helps contractors and subcontractors manage all aspects of CIS and PAYE including registration, payroll, CIS returns, and tax refunds ensuring full HMRC compliance.

Glossary of Key CIS and PAYE Terms

Construction Industry Scheme (CIS) – A tax deduction system used in the UK construction industry where contractors deduct tax from subcontractors’ payments and send it to HMRC.

Pay As You Earn (PAYE) – The HMRC system employers use to collect Income Tax and National Insurance directly from employees’ wages before they are paid.

Contractor – A business or individual that pays subcontractors for construction work and is responsible for deducting and reporting CIS tax to HMRC.

Subcontractor – A self-employed worker or company hired by a contractor to perform construction work. Tax is deducted from their payments under CIS.

Gross Payment Status – A special CIS registration allowing subcontractors to receive full payments without tax deductions. They then pay tax through Self Assessment or Corporation Tax.

Self Assessment – The process used by self-employed individuals and subcontractors to report income, claim expenses, and pay any tax owed to HMRC each year.

National Insurance Contributions (NICs) – Payments made to HMRC that count towards benefits such as the State Pension. PAYE employees have NICs deducted automatically, while CIS subcontractors pay them via Self Assessment.

Tax Code – A code issued by HMRC that determines how much Income Tax is deducted from an employee’s pay under PAYE.

Employment Status – HMRC’s classification of whether a worker is employed (PAYE) or self-employed (CIS). It depends on the actual working relationship, not just the written contract.

CEST (Check Employment Status for Tax) – An online HMRC tool used to determine if a worker should be classed as employed or self-employed for tax purposes.

CIS Return – A monthly report contractors submit to HMRC listing all subcontractors paid, amounts deducted, and tax sent to HMRC.

Deduction Statement – A document contractors provide to subcontractors each month showing gross payment, deduction rate, and tax withheld under CIS.

Real Time Information (RTI) – The PAYE reporting system where employers submit payroll data to HMRC every time employees are paid.

Class 2 and Class 4 NICs – National Insurance contributions paid by self-employed workers, including CIS subcontractors, through their Self Assessment tax return.

Employment Allowance – A government relief that allows eligible employers to reduce their annual National Insurance bill by up to £5,000 (2025/26 tax year).

HMRC – His Majesty’s Revenue and Customs, the UK government department responsible for collecting taxes, enforcing CIS and PAYE compliance, and administering Self Assessment.

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