The Difference Between CIS and PAYE
No matter how much you enjoy being a builder, no one does it just for the love of it. We all need to get paid, and when it comes to the way you choose to pay tax you may find you’re not taking home as much as you could.
Every self-employed builder needs to pick from PAYE or CIS tax schemes. They both work in slightly different ways, and if you don’t know the difference you can’t maximise your post-tax income at the end of the year. So here’s our handy guide to the merits of each, to help you make your choice.
What is the CIS?
CIS stands for Construction Industry Scheme, which is an initiative brought in by HMRC to minimise tax evasion in the construction industry, and protect construction workers from false employment. It’s been around since 1971, and basically instructs contractors to deduct 20% from their subcontractors pay to cover tax and national insurance contributions.
Contractors and subcontractors need to both be registered for CIS before starting any work. You can find out more about CIS for builders here.
What is PAYE?
Pay As You Earn (PAYE) is the system by which most part and full-time employees in any industry pay their tax and national insurance. Payments are calculated against earnings before being deducted from their pay check.
So what’s the difference to me?
If you’re a subcontractor, then the main difference between CIS and PAYE is that on the Construction Industry Scheme you’ll handover a fixed 20% to HMRC, instead of the ‘correct’ amount of tax that you’d pay as a PAYE builder which is defined by your tax code. Plus you can claim back certain expenses at the end of the year with CIS, which you can’t with PAYE (unless, of course, you have overpaid on tax due to a tax code discrepancy throughout the year.)
The downside with CIS is that when you don’t work, you don’t earn, and that includes holidays and sick days.
Which you choose is entirely up to you, and it doesn’t matter what your current trading status is. You can register for CIS as a Limited Company, a Partnership or a Sole Trader. Just don’t forget to use the right trading name and address with your contractor, as they’ll need these to find you on the scheme.
Do I always have to pay as I go?
No. With CIS you can choose ‘gross payments’ instead. You’ll pay the same amount, only in a lump sum at the end of the financial year, so there’s a bit more form filling to do. You can apply for gross payment status on the HMRC site.
What if I pay too much?
It’s your job to make sure your tax payments are accurate, but if you overpay CIS or PAYE you can just claim the difference back. Don’t worry, as the team at Brian Alfred can help support you with this.
What if I’m a contractor? How to register with CIS
Working within CIS as a contractor means sweating the details, but it has a lot advantages, namely everyone takes home more money, which means a happy crew. Here’s how to get going:
- Register – if you want to register for CIS as a contractor, you need to do it up front before you take anyone on. Leave at least two weeks before expecting your subcontractors to start work.
- ‘Verify’ your subcontractors – check they’re on the scheme too with HMRC. You can do all of this online.
- Once work starts, deduct 20% from everyone – everyone who is on the scheme of course (30% for anyone who isn’t)
- Check and double check – it all needs to be accurate, which means not including anything like VAT or materials in your calculations.
- Make your CIS payment to HMRC – you should be set up for payment following registration.
- File a monthly CIS return – again you can do this online, but check your calculations carefully. The scheme was created to help prevent fraud, which is why fines for giving the wrong employment status for any of your subcontractors can be up to £3000.
What if I want to switch part way through the financial year?
You can make the change from CIS to PAYE and vice versa at any point, just get in touch with HMRC and update your records as you go. It might require a bit of head scratching and a calculator, or the help of a good accountant, but if it saves you money in the long run then it’s definitely worth it. We at Brian Alfred are experts when it comes to builders tax rebates and we know a thing or two about the CIS so we can give you all the help and support you need.
Give us a call on 0800 464 0358 or visit our contact page to see how you can get in touch.