How to Pay a CIS Subcontractor: A Contractor's Step-by-Step Guide

If you pay subcontractors under the Construction Industry Scheme, you are not just a payer — you are also a tax collector. HMRC requires you to deduct money from your subcontractors' invoices, hand it over, report it monthly, and give each subcontractor a written statement. Get any step wrong and the penalty lands on you, not them.

Most contractor mistakes are not deliberate — they come from not knowing the exact sequence. This guide walks you through every step in order, with a worked calculation you can use as a template.

The Five Steps Every CIS Payment Requires

Before we go into detail, here is the complete sequence HMRC expects you to follow for every subcontractor, every time:

• 1
  Verify the subcontractor with HMRC

  Before the first payment, check their registration status using HMRC's CIS Online service. This tells you the deduction rate to apply.
• 2
  Receive a compliant invoice

  The invoice must clearly separate labour and materials. CIS applies only to the labour element.
• 3
  Calculate the deduction

  Apply the verified rate (0%, 20%, or 30%) to the labour element only. Materials and VAT are excluded.
• 4
  Issue a payment and deduction statement

  Provide the statement to the subcontractor on or before the date of payment. This is their evidence for claiming the deduction back.
• 5
  File your monthly return and pay HMRC

  Report all payments by the 19th of the following month. Pay the deductions to HMRC by the 22nd (electronic payment).

Step 1: Verify the Subcontractor Before You Pay

This is the step most contractors skip when bringing on someone they know or have worked with before. It is also the step that causes the most problems.

HMRC's rule is clear: you must verify every new subcontractor through CIS Online (via your HMRC business tax account or your commercial payroll/CIS software) before making any payment. The verification result tells you one of three things:

Once verified, do you need to verify again?

No — not for the same subcontractor within the same tax year. If you have already verified someone and you continue to use them, you use the same rate until the end of the tax year (5 April). You must re-verify a subcontractor only if they have not appeared on any of your CIS returns in the current tax year and the two preceding tax years. If there has been any recent return including them, you do not need to re-verify.

Step 2: Get a Correctly Split Invoice

Here is a mistake that costs subcontractors money on every job — and it starts with an invoice that does not separate labour from materials.

The CIS deduction applies only to the labour element of an invoice. Materials that the subcontractor supplies and passes through at cost are excluded. So if a subcontractor invoices £2,000 as one lump sum, you must deduct CIS from all of it. If they split it correctly — £1,200 labour, £800 materials — you only deduct from the £1,200.

As the contractor, you are entitled — and should encourage your subcontractors — to invoice correctly. If they are not sure how, point them to our CIS invoice guide or to the free invoice generator.

Step 3: Calculate the Deduction (With a Worked Example)

Once you have the verified rate and a correctly split invoice, the calculation is straightforward. Here is a full worked example for a registered subcontractor (20% rate):

Note: VAT is always calculated on the full invoice amount and is paid to the subcontractor in full (or handled under the Domestic Reverse Charge if applicable). VAT is never part of the CIS deduction calculation.

What if the subcontractor is unregistered?

Use 30% instead of 20%, applied to the same labour-only base:

Step 4: Issue the Payment and Deduction Statement

The payment and deduction statement is the subcontractor's official record of what was deducted from their pay. Without it, they cannot claim the deduction back from HMRC. Failing to provide it is a separate compliance failure in HMRC's eyes — even if your maths was correct.

What must the statement include?

• Your name and employer tax reference (your contractor UTR or PAYE reference)
• The subcontractor's name and UTR
• The tax month the payment falls into (e.g., "6 August to 5 September 2026")
• The gross amount paid (labour + materials)
• The amount included for materials (if any)
• The CIS deduction made and the rate applied
• The net amount paid to the subcontractor

Step 5: File the Monthly Return and Pay HMRC

Even if you made no payments to subcontractors in a given month, you must still file a nil return — HMRC does not assume silence means nothing happened. The return and payment follow a tight timetable:

What goes on the monthly return?

For every subcontractor you paid in that tax month:

• Their name and UTR
• The gross amount paid
• Materials figure (if applicable)
• Deduction amount
• Payment status: net (20%), gross (0%), or higher rate (30%)

When You Can Pay at 0%: Gross Payment Status

Some subcontractors hold Gross Payment Status (GPS) — HMRC's way of saying they have a clean compliance record and can be trusted to handle their own tax. When your CIS Online verification returns GPS, you pay the full invoice with no deduction.

You still have obligations, though. GPS subcontractors must still appear on your monthly return — the system records all CIS payments, whether a deduction was made or not. The return simply shows £0 deducted.

The Four Mistakes Contractors Make Most Often

1. Paying before verifying

Even a one-day gap between the first payment and verification is non-compliant. If HMRC audits you and finds payments made before the verification date, you are liable for any deduction shortfall — regardless of the subcontractor's actual status.

2. Deducting from materials as well as labour

This is the error that causes the most disputes. Materials are excluded from the CIS calculation. If you cannot get a split invoice, do not assume a split — apply 20% (or 30%) to the whole amount and ask the subcontractor to split correctly going forward.

3. Missing the 19th deadline on a monthly return

The first late return incurs a £100 penalty. After two months it rises to £200; after 12 months it can reach £3,000 per return. These accumulate fast and HMRC does not routinely waive them for contractors who simply forgot to file. See our CIS penalties guide for the full escalation table.

4. Not issuing the payment and deduction statement

The statement is not optional. Without it, your subcontractor cannot prove what was deducted and may be unable to reconcile their Self Assessment. If they raise this with HMRC, the trail leads back to you.

Quick Reference: CIS Deduction Rates