Tax deductions applied by the contractor are worked out slightly differently depending on whether you are registered as a CIS subcontractor. If you are a self-employed subcontractor, before you are paid on a new job your contractor will ask you for your address and your Unique Tax Reference number (UTR).
UTR: This is the 10-digit number HMRC gives to you when you register as self-employed. You can find it on your tax returns and on letters sent to you from HMRC.
Contractors use an online system to notify HMRC of the monthly payments they make to their subcontractors. Before you are paid for the first time, the contractor must check that you are registered for CIS. The HMRC system will look for your UTR on its list of registered subcontractors, it will then tell the contractor which deduction to use when paying you.
The tax deductions options are:
- 20% tax deduction: Most ‘labour only’ subcontractors will have tax deducted at a flat rate of 20%.
- 30% tax deduction: If 30% of tax is being deducted from your pay, this means either you haven’t given your employer a UTR or that HMRC couldn’t find your UTR on its list of registered subcontractors. You should contact HMRC and make sure you are correctly registered as self-employed and as a CIS subcontractor.
- No tax deducted: This is called gross payment. 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. This will only apply to larger subcontractors who have specifically asked to be paid without deduction of tax at source. Tax will still need to be paid, but this will be done via a tax return. Such subcontractors’ tax affairs are reviewed annually by HMRC to ensure they continue to meet the requirements. More information on being paid gross can be found at https://www.gov.uk/what-you-must-do-as-a-cis-subcontractor/gross-payment-status
