As a self-employed worker in the construction industry, you must choose between the PAYE and CIS tax plans. These structures operate in different ways, and if you don’t understand the differences, you might miss out on your after-tax income and other benefits at the end of each year. So, to make your life easier, here’s a guide on CIS and PAYE.
What is CIS?
The Construction Industry Scheme (CIS) is an HMRC effort designed to reduce tax fraud in the construction industry while also protecting employees from fake employment.
Under the CIS, contractors deduct money from a subcontractor’s salary payment and send it on to HMRC under the system. The deductions are considered advance payments for the national insurance and subcontractor’s tax.
What is PAYE?
Most part-time and full-time employees in any industry pay their tax and national insurance through the Pay As You Earn (PAYE) system. Before being taken from their salary, payments are assessed against earnings.
Your employer deducts Income Tax (IT), Pay Related Social Insurance (PRSI), and Universal Social Charge (USC) from your income and pays the difference to Revenue. PAYE guarantees that the yearly amounts you owe are collected consistently on each payday throughout the tax year.
What’s the difference?
The significant difference between CIS and PAYE if you’re a subcontractor is that you’ll pay a set 20% to HMRC rather than the ‘right amount of tax you’d pay as a PAYE builder, which is determined by your tax code. Plus, unlike PAYE, you may claim back some costs with CIS at the end of the year.
The disadvantage of CIS is that you don’t get paid if you don’t work, including vacations and sick days.
How can I set up CIS?
As a Contractor When you hire employees or use subcontractors for construction work, you must first register as an employer with HM Revenue and Customs (HMRC).
Even if you employ yourself, such as the only director of a limited business, you must register. You must register before the first payday and at least two months after reporting to begin paying individuals. After registering, you should be set up for payment.
Once work begins, take 20% from every employee under CIS’ salary. Everyone who is not will receive a deduction of 30%. This excludes VAT and materials from your calculations.
Lastly, file a monthly CIS return, which you can do through the internet. Make sure always to double-check your figures as the program was intended to prevent fraud, which is why providing your subcontractors with the wrong employment status may result in fines of up to £3000.
- As a Subcontractor
Subcontractors are workers under the CIS but do not pay NIC via their CIS payroll. Before paying a subcontractor for the first time, the contractor must ensure that the subcontractor is known to HMRC. HMRC will examine and validate this by verifying the subcontractor.
Subcontractors have a verification number placed into the ‘Verification Number’ box on this screen, or they can be confirmed through the program. Set the ‘Action’ choice to ‘Verify,’ double-check that the ‘ID Authentication’ information is accurate, then click ‘Transmit Live’ to send a verification request.
How can I verify my subcontractor/s?
Prepare the following details:
- Your HMRC employer reference
- Your Unique Taxpayer Reference (UTR)
You’ll also require the following information from your subcontractors:
- For a single trader, their UTR National Insurance number
- For someone in a small corporation, their company name, UTR, and registration number nominated partner information, the trading name
- For someone in a partnership, their partnership UTR
The information you give to verify the subcontractor must be identical to the information the subcontractor provided to HMRC when registering with HMRC.