CIS vs PAYE – When running a construction firm, a frequent question is: should you pay your site workers via the Construction Industry Scheme (CIS) or as employees under PAYE (Pay As You Earn)?
This choice directly affects your costs, compliance risks, and even the stability and satisfaction of your workforce. Here’s a clear breakdown to help you make the right decision for your construction business.
🔎 CIS vs PAYE: The Key Differences Explained
Both CIS and PAYE are tax collection systems operated by HMRC, but they differ fundamentally in employment status, taxation methods, benefits, and compliance.
| Feature | CIS (Self-Employed) | PAYE (Employee) |
|---|---|---|
| Tax Method | 20% or 30% deducted by contractor | Employer deducts tax & NIC automatically |
| Employment Status | Self-employed subcontractor | Direct employee |
| Holiday Pay & Sick Pay | Not entitled | Legally entitled |
| Tools & Equipment | Provided by subcontractor | Typically provided by employer |
| Responsibility for NIC | Paid by subcontractor (self-assessment) | Employer deducts NIC |
| Administration | Contractor submits CIS monthly returns | Employer handles payroll and reporting |
| Risk of HMRC Inspection | Higher (worker classification issues) | Lower, if correctly managed |
👷♂️ When is CIS the Right Choice?
CIS payments are typically suitable for genuine subcontractors who run their own business, work independently, and invoice multiple contractors.
CIS is ideal when workers:
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Use their own tools and materials.
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Set their own working hours.
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Manage their own workload and projects.
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Provide similar services to other businesses.
⚠️ Risks with CIS:
If your workers don’t fit these criteria, HMRC may challenge your use of CIS, which can lead to:
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Substantial back taxes and National Insurance contributions.
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HMRC penalties for misclassification.
💼 When is PAYE the Right Choice?
PAYE is best suited for permanent or long-term site workers who you control directly, provide equipment to, and who form a regular part of your workforce.
PAYE is ideal when workers:
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Are required to follow your instructions and working hours.
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Expect employment benefits (holiday pay, sick pay, pension).
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Work predominantly or solely for your business.
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Require minimal autonomy or independence on site.
✅ Benefits of PAYE:
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Greater legal protection.
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Improved worker loyalty and productivity.
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Clear compliance with HMRC regulations.
🔄 Hybrid Models: Combining CIS and PAYE
Larger construction businesses often use a hybrid model—employing core, long-term site workers via PAYE, while using genuine subcontractors under CIS for specialist or temporary roles.
However, ensure:
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Clear documentation distinguishing subcontractors from employees.
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Regular employment status reviews using HMRC’s CEST tool.
⚖️ Which Costs More: CIS vs PAYE?
PAYE workers typically cost more initially, because of Employer’s NIC, pensions, and holiday entitlements. However, CIS subcontractors can incur hidden costs through compliance risks, fines, and disputes if incorrectly classified.
Cost considerations:
| Cost Type | CIS | PAYE |
|---|---|---|
| Employer NIC | ❌ No | ✅ Yes |
| Pension contributions | ❌ No | ✅ Yes |
| Holiday & sick pay | ❌ No | ✅ Yes |
| Compliance risk | ⚠️ High | ✅ Low (if managed correctly) |
📌 Common Mistakes & How to Avoid Them
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Incorrectly classifying PAYE workers as CIS subcontractors
(Use HMRC’s CEST tool regularly to confirm employment status.) -
Forgetting to verify CIS subcontractors
(Always verify subcontractors with HMRC before the first payment.) -
Failing to separate labour from materials clearly
(Ensure all invoices clearly itemise labour to deduct CIS accurately.)
🧾 Using HMRC’s Employment Status Tool (CEST)
HMRC’s Check Employment Status for Tax (CEST) tool can provide clarity on whether your workers should be paid through CIS or PAYE.
👉 Check Employment Status for Tax Tool
💡 Expert Advice: What’s Our Recommendation?
From extensive experience helping established construction companies, we advise the following clear approach:
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PAYE for regular, supervised site workers
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CIS for independent, specialist subcontractors
Regular status reviews and documented checks using the CEST tool provide essential compliance safeguards.
🚩 Final Thoughts: Protect Your Business & Workers
Choosing CIS or PAYE isn’t simply a tax decision—it affects compliance, employment rights, your workforce stability, and your bottom line.
If you’re uncertain:
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Perform an immediate employment status review.
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Consult a construction specialist accountant for peace of mind.
📞 Need Professional Advice?
At Thomas Emlyn Ltd we help construction companies confidently manage workforce compliance. Our team can support you with:
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CIS compliance and monthly returns.
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Employment status reviews and PAYE payroll.
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HMRC inspections and dispute resolution.
Book a discovery call here to find out how we can support you and your construction business.
