If you’re a sole trader subcontractor working under the Construction Industry Scheme (CIS), it can be tricky to work out how much you owe HMRC.
That’s because contractors deduct a flat percentage from your pay under CIS, which probably doesn’t line up with how much you actually owe. Especially if your earnings are uneven across the tax year – that’s a mathematical nightmare.
The good news is that the Hnry service solves both these issues. We take into account any deductions already made from your pay, and only set aside any extra tax and National Insurance contributions that you might still owe. If you earn more on some projects than others, we take that into account too and adjust our tax calculations in real time.
Basically, you tell us the percentage already deducted from your payments, we sort the rest. Hnry makes it so you never have to think about tax again!
How deductions work under the Construction Industry Scheme
To make sure we’re on the same page, let’s go over how deductions under the Construction Industry Scheme actually work.
Under CIS, contractors deduct a flat percentage from the labour element of each payment they make to a subcontractor and send it straight to HMRC, where it sits as an advance payment against the subcontractor’s tax and National Insurance bill. Material costs are excluded from this deduction.
(“Contractor” and “subcontractor” here could refer to a limited company, a partnership, or a self-employed sole trader. What matters is the nature of the relationship, not the size of the businesses involved!)
Contractors have to register for CIS if they fall within scope. Subcontractors don’t have to register, but it’s almost always worth doing: registered subcontractors face a 20% deduction, unregistered ones 30%.
💡 Some subcontractors may qualify for gross payment status and receive payments in full. For more information, visit the gov.uk website.
Importantly, that 20% (or 30%!) isn’t likely to be the rate of tax you actually owe. If your CIS deductions don’t fully cover your tax and National Insurance bill, you may still have tax to pay after the end of the tax year. Not ideal!
📖 For more on how income is taxed, check out our guide to tax rates for sole traders.
💡 Not sure whether CIS applies to your situation? The gov.uk overview is a good starting point.
Hnry calculates what you actually owe
So if deductions are already being made from your earnings, likely at an inaccurate rate – what does Hnry do about it? Great question!
Firstly, here’s a quick rundown on how Hnry works:
Every time you’re paid through your Hnry Account, we automatically calculate and set aside anything you might owe to HMRC. This includes your:
- Income Tax
- National Insurance contributions (NIC)
- VAT collected (if applicable)
- Student loan repayments (if applicable)
The rest is forwarded on to your personal bank account, ready for you to spend. Easy! That’s the magic of the Hnry system – we sort your taxes in the background, so you can focus on the fun stuff (like the actual job).
Once you let us know that CIS deductions are being made from your payments, our system automatically takes them into account. Every time you’re paid through your Hnry Account, we’ll only set aside any additional tax and National Insurance contributions you might still owe.
That’s not all though – we also factor in any allowable expenses you raise through the Hnry App, passing on any tax savings you’re entitled to in real time. Raising expenses in Hnry is quick and simple – and if you use the Hnry Business Mastercard, practically automatic!
Setting up your CIS contractor payer in Hnry
To get this party started, we’ll need the details of your contractor payer under CIS, as well as the percentage at which they’re making deductions.
You can set this up in the Hnry App by creating a new client. Start by clicking the “Clients” tab in the main menu. Then click “Create New”:
From there, you’ll need to enter a few quick details, like the name of the contractor/company you perform work for.
💡 We’ll use these details to identify any payments coming through your Hnry Account.
Percentage of CIS deductions
This bit is the really important bit – you’ll need to indicate that this client “deducts tax prior to payment”, and input the percentage deducted:
Doing this tells the Hnry system to account for the deduction from any payment made by this client. If you have multiple clients you work for under the CIS scheme, you’ll need to set this up for each one.
Once you’ve done that, you’re done! We have everything we need to manage your taxes.
John is a subcontractor under the Construction Industry Scheme. He works for a construction company that falls under CIS, but also does one-off jobs for friends and family.
John starts using Hnry, and creates multiple clients in the Hnry App. He indicates that the construction company deducts 20% of each pay under CIS, and that his mates, his nephew, and his mum do not.
Every time he’s paid by the construction company, the Hnry system accounts for the 20% CIS deduction. Every time he’s paid by his mum, the Hnry system processes the full payment as per normal.
By the end of the tax year, John’s Income Tax and National Insurance contributions have been sorted. He heads to the pub to celebrate, and his mum takes the opportunity to negotiate mates rates.
Hnry takes care of taxes for sole traders
Hnry is an award winning app and tax service, designed specifically for sole traders. For just 1% +VAT of your self-employed income, capped at £600 +VAT a year, Hnry will calculate and pay all your tax bits and bobs for you, including:
- Income Tax
- VAT (if applicable)
- National Insurance contributions
- Student loan repayments
- Private Pension contributions (optional)
If you’re required to register for Making Tax Digital, we’ll complete and file your quarterly updates. If you’re not, we complete and file your Self Assessment – it’s all part of the service!
Better still, using the Hnry platform costs less than using a traditional accountant, and is entirely tax deductible.
If that sounds good to you, join Hnry today and never think about tax again!