CIS vs. PAYE – Understanding the differences

construction-work Whether you’re on the payroll of an umbrella company or you use the Construction Industry Scheme depends on how the company you are working for sets things up with their workers. If you are an employee, you’ll be on a PAYE scheme whereas if you are a contractor, it will be CIS. This blog explores the differences between CIS and PAYE and identifies the pros and cons of each system.

What is PAYE?

PAYE stands for Pay As You Earn which is the standard mechanism for employees on the payroll to pay tax and NI which is deducted at source.

What is an umbrella company?

An umbrella company, or PAYE umbrella, is a company that you can join as a self-employed contractor. This is an alternative to setting up your own limited company. When you join an umbrella PAYE company, you become their employee. The umbrella acts as an intermediary between you and your client.

What is CIS?

CIS stands for Construction Industry Scheme. It has been around since the early 1970’s when it was introduced to reduce tax evasion in the building industry. The CIS allows for a flat deduction of 20% of income from all invoices – a withholding tax if you like. Before starting work, contractors and subcontractors must be registered for CIS.

CIS vs. PAYE for subcontractors

So, what’s the difference between CIS and PAYE for subcontractors?

If you’re a subcontractor, then the main difference between CIS and PAYE is that on the Construction Industry Scheme, you’ll have automatic deductions made by the contractor of 20% irrespective of how what profits you’ve made. However, you can claim back certain expenses at the end of the year to reduce your overall tax bill which you can’t do if you are an umbrella company PAYE employee. If you have time off such as holidays and sick days, as a CIS worker, you won’t get paid whereas as an employee you will receive these benefits.

The company you are working with might give you the option to be an employee or a contractor, or you may not be given the choice. If you are registering under the CIS scheme, you can do this as a sole trader, partnership or limited company.

Are there activities which cannot use the CIS scheme?

There are also certain activities that are exempt from the scheme. HMRC defines these as:

  • architecture and surveying
  • scaffolding hire (where there’s no labour included)
  • carpet fitting
  • delivering materials to site
  • non-constructions work on construction sites such as running a canteen or other facilities

What is ‘gross payment status’?

Gross payment status in the CIS scheme means that you can apply not to have your tax deducted by your contractor. This means you’ll pay all your tax and NI at the end of the year in the same way as a normal self-assessment or limited company tax return. To qualify for gross payment status, you’ll need to demonstrate that:

  • your business does construction work (or provides labour for it) in the UK
  • you have a business bank account
  • you’ve paid your tax and National Insurance on time in the past

HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:

  • £30,000 if you’re a sole trader
  • £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
  • £30,000 for each director of a company, or at least £100,000 for the whole company

If your company’s controlled by 5 people or fewer, you must have an annual turnover of £30,000 for each of them.

Can you switch from CIS to PAYE part-way through the tax year?

It is possible to switch out of the CIS scheme but you will still need to file a tax return for the part of the year before you became an employee.

What must contractors do to administer CIS correctly?

Contractors must submit a file of information called a CIS300 to HMRC every month by the 19th of the following month. This details all the payments made under the CIS scheme. Contractors must also provide subcontractors with a payment and deduction schedule for their records. HMRC will impose penalties for late returns starting with a fixed penalty of £100 as soon as the return is one day late. Further penalties are imposed at 2 months, 3 months, 6 months and 12 months overdue but the amounts are complicated, so check out the government website about CIS penalties.

Do you have questions about CIS vs PAYE?

Getting your CIS information correct is vital whether you are a contractor or subcontractor – you could receive fines or penalties if the data is incorrect or late. Adams Accountancy provides accounting services in Sidcup and surrounding areas. Contact the team for a free consultation to learn more about how we help you get your systems working better and avoid expensive mistakes.

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Jan302023