Self-employed subcontractor tax deductions
If you are a self-employed subcontractor, before you are first paid on a new job the contractor you are working for will ask you for your address and your Unique Tax Reference number (UTR). Your UTR is the 10 digit number HMRC gives to you when you register as self-employed. It will be shown on your tax return and on letters sent to you from HMRC. (CIS cards with a photograph of the worker are no-longer issued). This information will be used to find you on HMRC’s Construction Industy Scheme (CIS) system.
Contractors use an on-line system to tell HMRC of the monthly payments they make to their subcontractors. Before the contractor is able to pay you for the first time they must use that system to check that you are registered for CIS (as well as being registered for self-employment). The HMRC system will look for your UTR on its list of registered subcontractors; it will then tell the employer what tax deduction to use. The options are:
- Payment after deduction of tax at 20% – most ‘labour only’ subcontractors will have tax deducted at a flat rate of 20%. This means that HMRC has found your UTR on their list of CIS subcontractors
- Payment after deduction of tax at 30%. If 30% tax is deducted from your pay, this means either that you haven’t given your employer a UTR, or that HMRC couldn’t find your UTR on its list of registered subcontractors. In either case you should contact HMRC and make sure that you are correctly registered as self-employed and as a CIS subcontractor.
- Gross payment – That is no tax deducted. You can only be paid gross if you pass special tests – including a minimum turnover test and a recent history of meeting all your tax obligations. Consequently this will only apply to larger subcontractors who have specifically asked HMRC to be paid without deduction of tax at source. Such subcontractors’ tax affairs are reviewed on an annual basis by HMRC to ensure that they continue to meet the requirements.
More information on being paid gross can be found at http://www.hmrc.gov.uk/cis/subcontractors/advice-pay.htm
CITB levy – From 6 April 2014 there is a change in HMRC policy. CIS tax deductions for a subcontractor will be based on your gross income before deducting any CITB levy re-charged to you by the main contractor. This could mean a very slight increase in the tax deducted. (Historically CIS deductions have been based on gross income after deducting any recharged CITB levy).
If you have a registered both as self-employed and under CIS, but 30% tax is being deducted from your money, you should check with HMRC and your main contractor than your UTR number has been correctly recorded.
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