The short answer
Paying subcontractors in the UK involves more than sending a bank transfer. If you're operating in construction, there's a compliance layer most project managers underestimate until HMRC comes knocking. Here's everything you need to know.
What is the Construction Industry Scheme (CIS)?
CIS is a HMRC tax scheme that requires contractors to deduct money from a subcontractor's payment and pass it directly to HMRC. It applies to most construction work including site preparation, demolition, building, alterations, repairs, and decoration.
If you're the paying contractor, you're responsible for making the correct deduction before any payment goes out. The subcontractor gets the net amount. HMRC gets the rest, credited against the sub's annual tax bill.
CIS deduction rates
There are three rates depending on the subcontractor's status:
- 20% for subcontractors registered with CIS
- 30% for subcontractors not registered with CIS
- 0% for subcontractors with gross payment status (verified by HMRC)
Always verify a subcontractor's CIS status with HMRC before the first payment. You can do this via the HMRC CIS online service. Verifying takes minutes. Getting it wrong makes you liable for the deduction HMRC expected.
What you need before paying a subcontractor
Before making any payment:
- Verify their CIS status with HMRC
- Get their Unique Taxpayer Reference (UTR)
- Confirm whether they're operating as a sole trader, partnership, or limited company
- Agree payment terms in writing — fixed-price or day rate
- Receive a valid invoice or signed timesheet
If they're a limited company and not a personal service company, CIS may not apply. When in doubt, consult your accountant before the relationship starts.
Payment timelines and legal obligations
There's no single statutory payment deadline for subcontractors, but the Construction Act (Housing Grants, Construction and Regeneration Act 1996) gives subcontractors clear rights around payment notices and pay less notices.
Key obligations for the paying contractor:
- Issue a payment notice within 5 days of the payment due date
- If you intend to pay less than the notified sum, issue a pay less notice at least 7 days before the final date for payment
- Missing these notice deadlines means you owe the full notified sum, regardless of any dispute
The reality on the ground: 77% of UK subcontract projects are paid late (Aston University, 2022). The average Days Sales Outstanding in UK construction sits at 83 days — the highest of any sector in the country (ONS / Creditsafe). That's not just a cash flow problem. UK construction recorded the highest number of business insolvencies of any sector in 2024, at 4,032 (Hill Dickinson, 2025). Late payment is a structural risk, not a minor inconvenience.
How to actually make the payment
Bank transfer via BACS or Faster Payments is the standard. Most subcontractors expect payment to a UK bank account.
For subcontractors operating across borders — common in specialist trades and larger project teams — options include SWIFT, open banking transfers for EU-based subs, and stablecoin settlement for contractors who prefer to receive in USDC rather than wait on a wire.
If you're running multiple subcontractors on a single project, the admin multiplies fast. The average SME general contractor spends up to 16 hours per month managing subcontractor invoices and payments (Petl Pay internal research). That's two full working days every month on reconciliation alone.
Common mistakes
- Not verifying CIS status before the first payment — puts you liable for the deduction HMRC expected
- Paying without a valid invoice or written agreement
- Missing pay less notice deadlines — you then owe the full amount regardless of the dispute
- Using personal banking apps to manage multiple sub payments — no audit trail, no reconciliation
- Treating subcontractor payments as payroll — different compliance, different deductions, different consequences
Tools worth using
Xero handles CIS deductions natively and is used by most UK construction accountants. If you're not already on it, start there for your accounting and compliance layer.
For managing the payment flow across multiple subcontractors on a single project, a payment orchestration layer reduces the manual work significantly. Petl Pay splits and settles payments from a single client invoice to multiple contributors, with CIS logic and a full audit trail built into the workflow — removing the 16-hour monthly admin burden for project teams running three or more active subcontractors.
Frequently asked questions
Do I need to register for CIS?
If you're paying subcontractors for construction work, yes. You register as a contractor with HMRC via the CIS online service. Registration is separate from your regular tax registration and is mandatory once you start paying subs.
What happens if I don't deduct CIS?
You become liable for the full amount HMRC would have collected, plus potential penalties. It's not optional and ignorance of the scheme is not a valid defence.
Can a subcontractor invoice me without CIS applying?
Yes, in certain cases — for example, if the subcontractor is a limited company not operating as a personal service company, or if the work falls outside CIS scope. But the invoice alone doesn't override your obligation to verify and deduct. When in doubt, verify with HMRC first.
What's the difference between a subcontractor and an employee in construction?
Employment status in UK construction is a complex area. HMRC applies tests around control, substitution, and mutuality of obligation. Getting it wrong means unpaid PAYE and National Insurance contributions. Take legal or accountancy advice before the working relationship starts, not after.
How do I pay subcontractors who are based overseas?
If the work is done in the UK, CIS may still apply regardless of where the subcontractor is based. For payment, options include SWIFT transfer, open banking for EU-based subcontractors, or stablecoin settlement. Each has different cost and speed profiles. Wise Business handles most international sub payments at significantly lower cost than high-street bank SWIFT fees.
What records do I need to keep for CIS payments?
Keep records of all subcontractor verifications, payment statements issued, deductions made, and monthly returns submitted to HMRC. CIS records should be kept for at least three years. A dedicated payment platform with built-in audit trail makes this significantly easier than spreadsheet tracking.
