For the self-employed in the UK construction industry, managing tax and National Insurance (NI) contributions can be a bit complex.
Those working under the Construction Industry Scheme (CIS) need to understand how their tax and NI contributions work to remain compliant with HMRC guidelines.
Here’s our guide on how CIS subcontractors can manage their contributions.
What is CIS?
The Construction Industry Scheme (CIS) is designed for self-employed individuals in construction who work as subcontractors.
Recommended CIS engagement providers ensure that tax is deducted from each payment that contractors receive. The provider will then pass that on to HMRC.
This system allows subcontractors to pay tax in advance, so they don’t face a large bill at the end of the tax year.
CIS subcontractors need to:
- Register with HMRC as self-employed
- Register for CIS as subcontractors
- Be aware that as self-employed workers, they don’t receive standard employment rights
National Insurance Contributions for CIS contractors
Although CIS deductions account for tax, they don’t cover National Insurance contributions. As self-employed workers, CIS subcontractors must manage NI contributions themselves through the annual self-assessment process. Here’s how it works:
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Self-assessment:
Subcontractors file a self-assessment tax return at the end of each tax year. This process calculates the remaining income tax due (after accounting for CIS deductions) and NI contributions owed.
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NI Contributions:
Self-employed individuals pay Class 2 and Class 4 NI contributions. Class 2 covers basic social benefits, while Class 4 is based on profits over a specific threshold. Both of these are calculated in the self-assessment, so it’s essential to budget for them.
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Offsetting tax deductions:
Since we remit CIS tax on behalf of the contractor, these payments are accounted for in the self-assessment, reducing the contractor’s overall tax bill that is still owed.
3 steps to register and pay NI
To simplify tax and NI obligations:
1. Register as self-employed:
To start, contractors need to register as self-employed with HMRC. This registration is essential, as it establishes their tax status as independent workers and assigns them a Unique Taxpayer Reference (UTR).
The UTR is vital for completing tax and NI payments through self-assessment, making it one of the first and most important steps. HMRC’s online platform guides applicants through the process, requiring some basic personal and business details.
2. Keep track of earnings:
Accurate earnings tracking is crucial for CIS subcontractors, as it allows them to monitor how much they’ve been paid and how much has been deducted under the CIS scheme. Apps and online tools can simplify tracking by helping subcontractors record income, expenses, and tax deductions as they work.
Tracking earnings carefully throughout the year is essential for calculating expected tax and NI liabilities, especially since CIS deductions apply only to tax and not to NI.
Keeping detailed records of income, business expenses, and CIS tax deductions also makes the end-of-year filing process much easier and reduces the risk of miscalculations.
3. File a self-assessment annually:
Every year, CIS subcontractors must file a self-assessment tax return, where they declare total earnings, pay any remaining tax, and calculate their NI contributions.
Filing the self-assessment on time – by January 31 following the tax year – ensures subcontractors avoid penalties and stay compliant.
During this process, CIS deductions made throughout the year are offset against the tax liability, potentially lowering the subcontractor’s remaining tax bill.
Subcontractors will also settle their Class 2 and Class 4 NI contributions based on their profit, covering their NI responsibilities for the year.
Conclusion
While CIS deductions simplify income tax payments, subcontractors are still responsible for their own NI contributions. By understanding how CIS and self-assessment work together, subcontractors can avoid unexpected bills and ensure compliance. For support on managing CIS or filing self-assessments, get in touch with us.
For more information, see our Fair Pay Services CIS Guide.