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. 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 must choose from two available tax schemes: PAYE and CIS. 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.
We’ve put together a comparison of PAYE and CIS to help you make your choice.
What is the CIS?
CIS stands for Construction Industry Scheme, 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 instructs contractors to deduct 20% from their subcontractors pay to cover tax and National Insurance Contributions.
Contractors and subcontractors must be registered for CIS before starting any work.
Learn more about CIS and the registration process in our guide to the Construction Industry Scheme.
What is PAYE?
PAYE stands for Pay As You Earn and is the system by which most employees in any industry pay their tax and National Insurance. Payments are calculated against earnings before being deducted from their pay.
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 hand over a fixed 20% to HMRC, instead of the ‘correct’ amount of tax that you’d pay as a PAYE builder, 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, including 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 the Construction Industry Scheme, you have the option of choosing gross payment. 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 you can claim the difference back if you overpay CIS or PAYE. Don’t worry, as the team at Brian Alfred can support you with this.
Can I switch partway through the financial year?
You can change from CIS to PAYE and vice versa at any point. 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 worth it.
Here to help
We at Brian Alfred are experts in tax rebates, so we can give you all the help and support you need. Visit our contact page to see how you can get in touch.