PAYE vs CIS vs Self-Employed: Which One Am I?

‍‌‌‌‌‌‌​​‌​‌‌‌‌‌​​​​‌‌​‌​‌‌​​‌‌‌‍> Disclaimer: SiteKiln gives you plain-English information, not legal or employment advice. Talk to a qualified professional before making big decisions.

The short version

PAYE, CIS and "self-employed" are not three choices you get to pick from. They're three different ways tax gets collected -- and they map onto different employment statuses with different rights, different risks and different numbers on your payslip. Getting the wrong one costs you money, rights, or both. Most people in construction have never had this explained properly.

Why this matters

Construction uses all three systems, often on the same site, sometimes for people doing near-identical work. The bloke plastering the ceiling on PAYE has holiday pay, sick pay and employer pension contributions. The bloke next to him on CIS has none of those -- and might be paying more tax than he thinks once he files his return.

The problem is that most people treat CIS as a "status." It isn't. CIS is a tax collection mechanism. Your actual employment status -- employee, worker, or genuinely self-employed -- is a completely separate legal question (see 3.1). Getting this wrong is the single most common mistake in construction, and it's one that HMRC is actively tightening up on.

The three systems explained

1. PAYE -- Pay As You Earn

This is how employees are paid. Your employer deducts income tax and employee National Insurance from your wages before you receive them. They also pay employer's National Insurance on top.

For the 2025/26 tax year:

Your employer handles all of this. You receive a net wage. You also get:

• Paid holiday (5.6 weeks minimum -- see 3.3)
• Statutory sick pay (from day one of illness from April 2026)
• Employer pension contributions (auto-enrolment)
• Statutory notice periods
• Unfair dismissal protection (after qualifying period)
• Redundancy pay (if applicable)
• National Minimum Wage protection

The trade-off: less take-home flexibility, but more security and rights. Your employer carries the cost and admin.

2. CIS -- Construction Industry Scheme

CIS is how HMRC collects tax from self-employed subcontractors in construction. It is not an employment status. It's a deduction-at-source system.

Before paying you, the contractor deducts a percentage from the labour element of your invoice (not materials, not VAT if you're VAT-registered) and sends it to HMRC as an advance payment towards your tax and NI bill.

The deduction rates for 2025/26:

How the deduction works in practice:

Say your invoice is £5,000 -- £3,500 labour, £1,500 materials. If you're registered:

• CIS deduction: 20% of £3,500 = £700
• You receive: £4,300 (£3,500 - £700 + £1,500)
• HMRC gets: £700, credited against your Self Assessment bill

If you're unregistered, that deduction jumps to 30% -- £1,050 on the same invoice. That's £350 more going to HMRC upfront because you didn't register. There is no excuse for not registering.

What CIS does NOT give you:

• No holiday pay
• No sick pay
• No employer pension contributions
• No notice periods
• No unfair dismissal protection
• No redundancy pay
• No National Minimum Wage guarantee

CIS is purely a tax mechanism. It tells HMRC how much has been deducted at source. It tells you nothing about your actual rights.

Gross payment status means you get paid the full amount with no deductions. You're responsible for paying all your own tax and NI through Self Assessment. To qualify, you need to pass HMRC's compliance tests -- a clean tax record, meeting the turnover test, and from April 2024, VAT compliance too. From 6 April 2026, HMRC can immediately remove gross payment status if a business makes or receives a payment connected to fraud, with a 30% penalty and a five-year ban on reapplying (up from one year).

3. Self-employed (sole trader or limited company)

If you're genuinely self-employed, you run your own business. You invoice for work, you manage your own tax through Self Assessment, and you carry the financial risk.

For a sole trader in 2025/26:

If you work through a limited company (PSC), the picture changes -- you pay yourself a mix of salary and dividends, Corporation Tax applies to company profits, and IR35 may apply (see 3.2).

What genuine self-employment gives you:

• Control over how, when and where you work
• Ability to work for multiple clients
• Right to send a substitute
• Ability to claim business expenses against tax
• Potential for higher net income if you manage your tax well
• The 5.6 weeks of "holiday" built into your pricing (you're paying for your own time off)

What it doesn't give you:

• No holiday pay, sick pay, notice or redundancy from anyone else
• No employer pension contributions
• No employment rights protection
• You carry all the financial risk if work dries up or a client doesn't pay
• You file your own Self Assessment and pay your own tax bill

The comparison table

The money -- what it actually looks like

Let's say you earn £40,000 gross in a year. Here's roughly what happens under each system (simplified, 2025/26 rates, single person, no other income, England/NI/Wales):

PAYE employee on £40,000 salary:

• Income tax: ~£5,486
• Employee NI (Class 1): ~£2,194
• Take-home: ~£32,320
• Plus: holiday pay, SSP, employer pension, notice rights
• Your employer also pays ~£5,250 in employer's NI on top

CIS subcontractor (registered, no materials) earning £40,000 in labour:

• CIS deducted at source: 20% = £8,000 (credited against your tax bill)
• Actual income tax due: ~£5,486
• Class 4 NI due: ~£1,646
• Class 2 NI: £0 (auto-credit above £6,845)
• Total tax + NI: ~£7,132
• CIS already deducted: £8,000 -- so you'd get a refund of ~£868 at Self Assessment
• Net income: ~£32,868
• But: no holiday pay, no sick pay, no pension, no rights. If you factor in 5.6 weeks unpaid holiday, your effective earning weeks are 46.4 -- and your daily rate needs to cover those gaps.

Genuinely self-employed sole trader, £40,000 profit (after expenses):

• Income tax: ~£5,486
• Class 4 NI: ~£1,646
• Class 2 NI: £0
• Net income: ~£32,868
• Same as CIS in pure numbers, but you've already deducted expenses before calculating profit -- so your gross billings may have been higher
• Same absence of employment rights

The numbers look similar. The difference is in what you're not getting. An employee on the same gross gets paid for nearly six weeks of doing nothing. A CIS subcontractor or self-employed worker gets nothing for those weeks -- and if you're not pricing that into your day rate, you're working for less than you think.

"I'm on CIS so I'm self-employed" -- why this is wrong

This is the most dangerous assumption in construction. Being paid through CIS does not make you self-employed. CIS is a tax collection system. Employment status is a legal question based on the reality of your working relationship.

You can be on CIS and actually be:

• An employee -- if the company controls how you work, you can't substitute, you have no financial risk, and you're fully integrated into their business. In which case, you should be on PAYE with full employment rights.

• A worker -- if you personally perform the work, have limited autonomy, but aren't quite an employee. You still get holiday pay and National Minimum Wage protection.

• Genuinely self-employed -- if you control how and when you do the work, can substitute, carry genuine financial risk, and operate as an independent business.

The company paying you through CIS rather than PAYE doesn't change your legal status. It just changes how tax is collected. And if HMRC or a tribunal later decides you were actually an employee, the company faces backdated PAYE, employer's NI, penalties, and you may be entitled to years of holiday pay, pension contributions and other rights you never received (see 3.1 and 3.3).

CIS and PAYE can't both apply to the same payment

This is an important technical point that many construction companies get wrong. If someone is an employee (or deemed employed under IR35), you put them on PAYE. CIS does not apply to payments that are already within PAYE. They're mutually exclusive for the same engagement.

If someone is genuinely self-employed, you verify them with HMRC and pay them through CIS.

Running an employee through CIS instead of PAYE isn't a "grey area." It's wrong. And from April 2026, HMRC's new CIS fraud powers make the consequences sharper -- immediate removal of gross payment status, 30% penalties, and a five-year lockout from reapplying.

What's changing -- April 2026 and beyond

Several things are tightening:

• CIS fraud powers (6 April 2026): HMRC can immediately cancel gross payment status where a business knew or should have known a payment was connected to fraud. Penalties of up to 30% on the tax loss. Five-year ban on reapplying for GPS (up from one year).

• Nil returns reinstated (6 April 2026): Contractors will again be required to submit CIS returns even in months where no payments were made to subcontractors.

• Fair Work Agency (7 April 2026): New enforcement body with powers across employment rights -- expect more scrutiny on misclassification.

• Employment Rights Act 2025: Status provisions still awaiting commencement, but the direction is toward tighter scrutiny of false self-employment, particularly in construction (see 3.1).

• Employer NI secondary threshold (£5,000): Remains frozen until at least April 2028, then rises with CPI. This makes employing people more expensive -- which perversely creates more incentive for companies to push people onto CIS. Expect HMRC to watch for exactly that.

Which one should you be on?

You don't get to choose based on what's most tax-efficient. Your status depends on the reality of your working arrangement. But here's a rough guide:

You're probably an employee (PAYE) if:

• They tell you when to start and finish
• They control how you do the work
• You can't send someone else
• You use their tools and equipment
• You work for one company most of the time
• You get regular hours and regular pay

You're probably genuinely self-employed (CIS or Self Assessment) if:

• You control how and when you do the work
• You can genuinely substitute
• You carry financial risk (you fix mistakes at your own cost)
• You have multiple clients
• You provide your own tools and equipment
• You invoice for completed work, not hours

If you're in the middle -- particularly if you're labour-only, on one site, directed daily, but paid through CIS -- your status needs a proper look. See 3.1 for the tests.

What to do

• Understand what you actually are. Not what the company told you. Not what the contract says. What happens in practice, day to day. The tests in 3.1 will help.

• If you're on CIS, check you're registered. Unregistered means 30% deductions instead of 20%. That's money you don't need to lose. Call the CIS helpline or get your accountant to sort it.

• Keep your CIS deduction statements. Every contractor who pays you under CIS must give you a payment and deduction statement showing how much was deducted. You need these to file your Self Assessment and claim back any overpayment. If you're not getting statements, chase them -- it's a legal requirement on the contractor.

• File your Self Assessment. If you're on CIS, you almost certainly need to file a tax return. Many CIS workers overpay tax through deductions and are owed a refund -- but you only get it if you file.

• Price in what you're not getting. If you're self-employed and not getting holiday pay, sick pay or pension, your day rate needs to cover all of that. A rough rule of thumb: add at least 15--20% to what you'd accept as a PAYE wage to account for the missing benefits and the admin you're taking on.

• If your status looks wrong, get advice. ACAS (0300 123 1100) for employment rights questions. An accountant for tax. Don't assume the company has got it right -- they may have got it wrong deliberately.

What to do next

• Work out your actual employment status using the tests in guide 3.1 -- not what the company told you, but what happens day to day.
• If you're on CIS, make sure you're registered -- unregistered means 30% deductions instead of 20%.
• Keep all CIS deduction statements and file your Self Assessment to reclaim any overpaid tax.
• Price in what you're not getting -- if you're self-employed with no holiday pay, sick pay, or pension, your day rate needs to cover those gaps (add at least 15-20%).
• If your status looks wrong, get advice from ACAS or an accountant before raising it with your employer.

Sources

• Income Tax (Earnings and Pensions) Act 2003 -- PAYE and employment income provisions
• Finance Act 2004, s.74 -- definition of construction operations (CIS)
• Income Tax Act 2007 -- CIS regulations
• HMRC guidance: Construction Industry Scheme -- a guide for contractors and subcontractors
• HMRC guidance: What you must do as a CIS subcontractor / contractor (GOV.UK)
• HMRC guidance: Rates and thresholds for employers 2025 to 2026 (GOV.UK)
• HMRC guidance: Check employment status for tax (CEST) (GOV.UK)
• HMRC guidance: Rates and allowances -- National Insurance contributions (GOV.UK)
• Social Security Contributions and Benefits Act 1992 -- Class 2 and Class 4 NI
• Employment Rights Act 1996, s.230 -- definitions of employee and worker
• Employment Rights Act 2025 (Royal Assent 18 December 2025; provisions phasing in through 2026--2027)
• Construction Industry Scheme: tackling fraud -- HMRC policy paper, November 2025 (measures effective 6 April 2026)
• ACAS guidance on employment status

This guide is for information only. It is not legal or tax advice. If you need advice on your specific situation, speak to an accountant, ACAS, a union, or a solicitor who deals with employment or tax law. Do not use this page as a legal or tax defence.

Common questions

What rate should CIS deductions be?

20% if you're registered with HMRC, 30% if you're not, and 0% if you have Gross Payment Status. The contractor verifies your status with HMRC before paying you. If they're deducting 30%, register for CIS today. It's free and the rate drops at the next pay run.

CIS Rates reference card.

Can I claim back CIS deductions?

Yes. CIS deductions are advance payments of Income Tax and National Insurance, reclaimed via Self Assessment. Limited companies offset CIS deductions against PAYE/NI owed each month. Sole traders typically receive a refund within 6 to 12 weeks of submitting their return.

CIS Refund Estimator.

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