How does CIS payroll work?

How does CIS payroll work?

If you run a successful construction business and enlist the help of subcontractors, then payroll might work a little differently for you. Rather than using the traditional PAYE system, you will be expected to use the Construction Industry Scheme (CIS) to pay subcontractors for their work.

CIS is an industry-specific payroll system aimed at construction businesses or companies that spend over £3 million on construction work within 12 months. Rather than deducting tax and National Insurance based on individual tax codes, you’ll deduct a flat 20% or 30% for the subcontractors you hire.

In this blog, our experts guide you through the intricacies of CIS payroll, from joining the scheme and calculating tax to paying subcontractors correctly. If you’re a small business owner, a sole trader or managing a limited company and need to hire and pay subcontractors for their work, then keep reading to learn more.

At Ascott Blake, we are a skilled team of chartered accountants who support clients with the financial aspects of running a business, including managing CIS payroll. For more information about our CIS payroll services, please get in touch today for specialist advice.

What is CIS payroll?

The Construction Industry Scheme (CIS) is a specific payroll system designed for hiring the support of self-employed subcontractors in the construction industry. It involves contractors deducting a fixed percentage from subcontractors’ pay to cover income tax and National Insurance contributions. These deductions are then passed over to HM Revenue & Customs (HMRC) as advance payments.

CIS is a specific scheme initiated by HMRC to help simplify the payroll process and ensure tax compliance.

Who comes under the CIS payroll?

CIS applies to self-employed subcontractors who participate in construction work, such as building projects, maintenance and repairs or demolishing older structures. It doesn’t apply to workers with a permanent employment contract.

It is up to you, as the contractor, to determine whether the people you are looking to hire are self-employed subcontractors. This is crucial for CIS compliance as you should only operate under the Construction Industry Scheme if you hire self-employed individuals.

If you directly employ someone under an employment contract, then this will fall under the traditional PAYE system, meaning tax and National Insurance will need to be charged differently.

What is the difference between CIS payroll and PAYE?

CIS and PAYE offer businesses a way to pay individuals for their work, but each has its own distinct implications and caters to different industries.

CIS payroll specifically targets the construction industry to help regulate payments between contractors and subcontractors and ensure accurate tax payments are made. It requires contractors and large organisations who need significant contract work to deduct money from the subcontractors’ pay. This is a fixed deduction, depending on the type of subcontractor hired, which covers tax and National Insurance contributions.

Pay As You Earn (PAYE), on the other hand, is the traditional system for employing workers in any industry and one you might already be familiar with. It involves employers making National Insurance and income tax deductions from employees’ wages before paying them. These are typically based on the employees’ personal tax code and must be calculated before paying employees.

Step-by-step CIS payroll process

As a growing construction company or a large enterprise looking to conduct a significant amount of construction work, it is crucial to understand the CIS payroll process. This will help you ensure you pay workers accurately and follow the correct CIS rules.

1) Registering for the Construction Industry Scheme

Registering for CIS is the first crucial step to hiring and paying subcontractors through CIS payroll. To do so, you must determine whether your business meets the CIS criteria. You’ll need to run a construction business that hires subcontractors or a company that spends £3 million or more on construction-related activities within 12 months.

If you fit into these categories, head to HMRC to register as a CIS contractor.

All construction businesses and large organisations who hire subcontractors must be CIS registered in order to operate under CIS payroll. Subcontractors do not have to register for CIS, but they can receive higher-rate deductions if they don’t.

2) Verifying subcontractors

Once you are CIS registered, you can then begin hiring subcontractors to carry out construction work. It is crucial, however, to verify the employment status of the subcontractors you hire, as they must be self-employed.

You can verify subcontractors through HMRC, who will be able to tell you whether they are CIS registered and what their CIS tax rates are.

The tax deductions will typically be:

  • 20% for CIS-registered subcontractors
  • 30% for unregistered subcontractors
  • 0% if they have a ‘gross payment status’

3) Deductions and payment process

When it comes to paying subcontractors for their work, you are responsible for making deductions for expenses that the subcontractor has paid for, including VAT, equipment, fuel and other relevant expenses. You can ask for proof of the expense if required.

Then, you must deduct the CIS tax based on their verification status and the tax rates HMRC has provided. These deductions will need to be sent to HMRC, along with a monthly CIS return.

You will pay the remaining wages to the subcontractor along with their payment statement detailing their wage and deductions.

4) Record keeping and reporting

As part of the CIS rules and regulations, contractors are required to keep up-to-date and accurate records of all CIS payments, deductions, and CIS returns for at least 3 years after the end of their corresponding tax year. This is essential for ensuring compliance and facilitating accurate financial reporting.

If you need assistance storing and maintaining accurate documents for CIS payroll, cloud accounting makes the process much more straightforward.

How do taxes apply to the Construction Industry Scheme?

When operating under the Construction Industry Scheme, the tax will work differently than the traditional Pay As You Earn method for employees. It all depends on the type of subcontractor you hire and what HMRC has determined their CIS tax rate.

CIS ensures that income tax and National Insurance contributions are deducted before subcontractors receive any pay, ensuring tax affairs are correctly maintained in the construction industry.

As a contractor, you’ll play a key role in properly maintaining tax affairs.

Income Tax for CIS

You’ll be required to deduct income tax payments from the subcontractors’ pay following their tax status, which is determined by HMRC. It will either be a standard rate of 20% for verified subcontractors or a higher rate of 30% for unverified subcontractors.

Income Tax deductions will be directly sent to HMRX to cover subcontractors’ tax obligations.

National Insurance for CIS

Subcontractors are also subject to National Insurance contributions, as well as income tax. These NI contributions are calculated based on the subcontractor’s tax status and deducted at the same time as CIS income tax. There is no separate tax status for NI, as the flat rate covers both.

Speak to Ascott Blake for CIS payroll support

Understanding the various rules and regulations of CIS can be challenging and time-consuming, but with the help of an experienced CIS accountant, we can make managing CIS payroll easy.

At Ascott Blake, we are a dynamic accountancy firm backed by a dedicated team of chartered accountants. With a specialist focus on CIS compliance, we’ll help you navigate the unique payroll process and ensure subcontractors and HMRC get paid on time.

Our swift CIS payroll solutions can be tailored to your business, making them work for you and the people you hire. With our help, you can get a seamless CIS payroll solution at the most affordable cost.

Contact us today, and we’ll make sure your CIS payroll processes are fully taken care of.

Conclusion

Ultimately, CIS payroll is there to simplify and monitor how individuals in the construction industry calculate and pay tax. It ensures transparency and accountability between contractors and subcontractors.

As a contractor who operates under the Construction Industry Scheme, it is essential to take time to verify subcontractors and maintain accurate records. Enlisting a professional CIS accountant like Ascott Blake can significantly improve your payroll process, saving you time and providing added assurance that your business is working in line with the correct regulations.

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