CIS vs PAYE for Construction Businesses: Choosing the Right Option for Your Growing Crew

Why the CIS vs PAYE for Construction Businesses choice matters?

Choosing how you pay your construction workforce is a big decision in the CIS vs PAYE for Construction Businesses debate.

In the UK, most construction firms use one of two payment models:

• CIS (Construction Industry Scheme)

• PAYE (Pay as You Earn)

Each model comes with its own rules, costs, and risks.

Making the right choice affects:

• Your business’s compliance with HMRC

• How much you spend on payroll and taxes

• The stability and satisfaction of your workforce

Many construction companies use both CIS and PAYE. For example, you might pay long-term staff through PAYE and bring in subcontractors under CIS for short-term projects.

Are you confident you’re using the best scheme for each worker? The answer can impact your bottom line and your peace of mind.

Ready to compare CIS and PAYE?

Let’s break down the basics!

 

Understanding the Basics: What Is CIS and What Is PAYE?

PAYE (Pay as You Earn)

• Used for employees on your payroll.

• You, as the employer, handle tax, National Insurance, and pension contributions.

• Employees receive benefits such as holiday pay, sick leave, and employment protections.

• Pay slips are provided for every pay period.

CIS (Construction Industry Scheme)

• Designed for self-employed subcontractors in construction.

• Contractors deduct tax at 20% (or 30% if the subcontractor is not registered) before paying the worker.

• You report these deductions to HMRC each month.

• Subcontractors are responsible for filing their own annual tax returns and can claim rebates if they overpaid tax.

Determining Worker Status: Employee or Subcontractor?

Getting worker status right is essential for compliance.

HMRC uses several criteria to decide if someone is an employee or a subcontractor.

These include:

• Who controls how and when the work is done?

• Who provides the tools and equipment?

• Who takes the financial risk?

Signs of Subcontractor Status:

• Uses their own tools and equipment

• Works for multiple clients or on different sites

• Sets their own working hours and schedule

Signs of Employee Status:

• Has fixed working hours set by you

• Works under your supervision and direction

• Receives company benefits like holiday pay or sick leave

 Cost Comparison: What Each Scheme Means for Your Budget?

Cost Factor	PAYE	CIS
Employer National Insurance	Required	Not applicable
Pension Contributions	Required (auto-enrolment)	Not applicable
Payroll Administration	Higher	Medium (CIS return management)
Worker Flexibility	Lower	Higher
Tax Deductions	Managed by employer	Handled by subcontractor

Understanding these cost differences helps you plan your workforce budget more accurately.

PAYE involves more employer expenses but offers stability.

CIS reduces employer costs but shifts tax handling to subcontractors.

Legal & Compliance Considerations

• Misclassifying employees as subcontractors is a serious compliance risk. HMRC can require you to pay backdated tax, National Insurance, and impose penalties. This can also trigger audits and damage your business reputation.

• Late CIS returns result in automatic penalties. The initial penalty is £100 if a return is late. Penalties increase after two, six, and twelve months if the return remains outstanding.

• Inaccurate or incomplete records can lead to further fines. HMRC may charge penalties if errors are caused by lack of reasonable care or are found to be deliberate.

• Contractors must always verify a subcontractor’s CIS registration before making payments. Failing to do so can result in higher tax deductions for the subcontractor and possible fines.

• Both CIS and PAYE require robust and accurate record keeping. Missing, incorrect, or late paperwork can result in fines and increased scrutiny.

Staying compliant protects your business from financial penalties, legal action, and reputational harm. Regularly review your processes and worker classifications to reduce risk and ensure all HMRC requirements are met.

Choosing the Right Option for Different Roles

Selecting between CIS and PAYE is not just about payroll, it shapes your business costs, compliance risks, and workforce stability. Understanding when each model fits best can help you avoid misclassification and HMRC penalties.

CIS is suitable when:

• Projects are short-term, seasonal, or require specialist skills.

• You engage independent tradespeople who use their own tools and work for multiple clients.

• Flexibility is a priority, allowing workers to set their own hours and manage their workload.

• Subcontractors invoice your business and are not entitled to employment benefits like holiday or sick pay.

• You want to reduce employer costs, as there are no requirements for employer National Insurance or pensions.

CIS can offer cost savings, but it comes with higher compliance risks. If HMRC finds that a worker treated as a subcontractor should be an employee, your business could face backdated tax, National Insurance, and penalties.

PAYE is suitable when:

• You are building a long-term, stable team that works mainly for your business.

• Direct control over schedules, methods, and work output is required.

• You provide employment benefits such as holiday pay, sick pay, and pension contributions.

• Workers use company equipment and follow your instructions on site.

• You want to reduce compliance risks and support workforce retention, as PAYE offers greater legal protection and stability.

PAYE does increase employer costs due to National Insurance, pensions, and statutory benefits, but it ensures clear compliance and can improve worker loyalty.

Blended approach example:

Many construction firms use both schemes to match roles and project needs.

• Site managers and administrative staff are typically on PAYE, reflecting their permanent roles and need for employment protections.

• Electricians, plumbers, and other short-term trades are paid under CIS, offering flexibility for project-based work.

• This hybrid model is legal, but you must keep clear documentation and regularly review worker status to stay compliant with HMRC rules.

Regularly using HMRC’s CEST (Check Employment Status for Tax) tool can help confirm that each worker is correctly classified. Keeping clear records and reviewing roles as projects change will help you avoid costly mistakes and support both compliance and operational efficiency.

Switching Mid-Year or Using Both

Switching a worker from CIS to PAYE during the tax year is allowed, but it requires careful management.

• You must update HMRC records promptly to reflect the change in worker status.

• Both you and the worker need to keep clear records of payments made under each scheme.

• When filing tax returns, the worker’s income must be reported correctly for the periods under CIS and PAYE.

• Subcontractors switching to PAYE may need to deregister as self-employed with HMRC to avoid confusion or duplicate tax filings.

• Employers should communicate clearly with workers about the change to manage expectations around benefits, tax deductions, and payroll processes.

• Using both CIS and PAYE within the same business is common. For example, a firm may have permanent staff on PAYE while hiring subcontractors on CIS for specific projects.

• Ensure your payroll and accounting systems can handle both schemes simultaneously to avoid errors.

• Regularly review worker status to confirm it remains accurate, especially if roles or working arrangements change.

Properly managing mid-year switches and blended workforce models helps maintain compliance and reduces the risk of penalties. It also supports smoother payroll processing and clearer financial planning.

 Practical Tips to Stay Compliant

• Register for CIS before hiring any subcontractors to ensure you meet HMRC requirements from the start.

• Submit CIS returns every month, even if you have not made any payments that period.

• Keep detailed records of all subcontractor payments, verification checks, and tax deductions.

• Store copies of CIS statements issued to subcontractors each month.

• Use the correct tax codes for PAYE employees to avoid payroll errors.

• Regularly review your workforce to confirm each worker’s status and scheme assignment.

• Set reminders for key deadlines to avoid late submissions and penalties.

• Invest in reliable payroll and accounting software that supports both CIS and PAYE processes.

Following these steps reduces the risk of costly mistakes and keeps your business on the right side of HMRC regulations.

There’s No One-Size-Fits-All!

CIS and PAYE both have clear roles in the construction industry.

Each scheme offers different benefits and obligations, depending on your business needs and workforce structure.

Blending CIS and PAYE can provide flexibility and control, as long as you apply each scheme correctly.

Focus on matching the right payment model to each worker’s role and situation.

Accurate classification and compliance are key to avoiding penalties and supporting your business’s long-term success.

Need help managing PAYE, CIS, or payroll compliance?

AMS Admin Services supports construction firms across the UK with expert setup, returns, and reporting.

Let us handle the complexity so you can focus on building your business!