Employment Allowance and CIS: a builder's guide
Under the Construction Industry Scheme, a contractor deducts 20% from payments to a registered subcontractor and 30% from an unregistered one, passing that money to HMRC as an advance payment against the subcontractor's tax and National Insurance [1]. Separately, an eligible employer can reduce its employer National Insurance bill by up to £10,500 a year through Employment Allowance [2]. Construction businesses routinely deal with both, and the two are frequently confused.
The confusion is understandable. Both involve payments to HMRC, both touch National Insurance, and both are reported through the same monthly submission. But they are different systems solving different problems. CIS is a tax-collection mechanism for payments between businesses in construction. Employment Allowance is a relief against the National Insurance an employer pays on its own staff.
This guide explains what each system does, whether a construction business can claim Employment Allowance, and how CIS deductions and the allowance sit together on the Employer Payment Summary. It is written for construction employers, subcontractor companies and the accountants who handle their payroll and CIS returns.
Key takeaways
- CIS deductions are advance payments of a subcontractor's tax and National Insurance, taken at 20% (registered), 30% (unregistered) or 0% (gross payment status).
- Employment Allowance is a separate relief of up to £10,500 for the 2026-27 tax year against an employer's secondary Class 1 National Insurance.
- A construction business can claim Employment Allowance if it operates PAYE for employees and meets the eligibility rules, regardless of its CIS status.
- A sole-trader subcontractor with no employees has no employer National Insurance to reduce, so cannot claim Employment Allowance.
- Both CIS set-off and Employment Allowance are reported on the Employer Payment Summary, which is why they are so often muddled.
Two different systems: CIS and Employment Allowance
The Construction Industry Scheme and Employment Allowance operate in separate parts of the tax system. Understanding what each one actually reduces is the key to keeping them apart.
What CIS deductions are
The Construction Industry Scheme requires contractors to deduct money from payments made to subcontractors for construction work, and to pass those deductions to HMRC [3]. The deduction is not a tax in itself: it is an advance payment set against the subcontractor's eventual Income Tax and National Insurance liability [4].
The rate depends on the subcontractor's status. The table below sets out the three possibilities.
| Subcontractor status | CIS deduction rate |
|---|---|
| Registered and verified | 20% |
| Not registered or unmatched | 30% |
| Gross payment status | 0% |
A registered subcontractor has 20% withheld, an unregistered one has 30% withheld, and a subcontractor holding gross payment status is paid in full with nothing deducted [5]. Gross payment status is granted to subcontractors who pass HMRC's turnover, compliance and business tests, and means the subcontractor settles its tax and National Insurance directly rather than through withholding [6]. None of these deductions is a National Insurance relief, and none of them touches Employment Allowance.
What Employment Allowance reduces
Employment Allowance reduces only one thing: an employer's secondary Class 1 National Insurance, the National Insurance an employer pays on its employees' earnings [7]. For the 2026-27 tax year the allowance is worth up to £10,500, and it is used up as the employer runs payroll until the balance is exhausted or the tax year ends [8].
The allowance offsets the 15% employer National Insurance charged on earnings above the £5,000 Secondary Threshold [9]. It has no bearing on CIS deductions, on the tax deducted from employees under PAYE, or on the subcontractor payments a contractor makes. A construction employer running SME payroll software sees the allowance applied automatically against employer National Insurance each payrun, entirely separately from any CIS return.
Can a construction business claim Employment Allowance?
The answer depends on whether the business has employees and pays employer National Insurance, not on its position in the construction supply chain. CIS status, contractor or subcontractor, is irrelevant to Employment Allowance eligibility.
Limited company subcontractors with employees
A limited company that works as a CIS subcontractor and also employs staff on PAYE pays employer secondary Class 1 National Insurance on those employees. If it meets the standard eligibility rules, it can claim Employment Allowance against that liability [10]. Being a subcontractor that suffers CIS deductions does not disqualify the company; the two matters are assessed independently.
There is one common trap. A company cannot claim if it has a single director who is the only employee liable for secondary Class 1 National Insurance [11]. Many small construction companies run exactly this structure, a single working director drawing a salary, and they are not eligible until a second employee is paid above the Secondary Threshold. Accountants running CIS and payroll for several such clients often manage eligibility through a multi-client payroll dashboard that flags which schemes qualify.
Sole traders and single-director companies
A self-employed sole-trader subcontractor with no employees has no employer secondary Class 1 National Insurance, so there is nothing for Employment Allowance to reduce [12]. The CIS deductions taken from that sole trader's payments are recovered through Self Assessment at the end of the year, not through payroll [13].
Service companies face a further restriction: they cannot claim Employment Allowance in respect of deemed payments of employment income [14]. For most owner-managed construction firms the practical rule is straightforward: the allowance is available only where the business genuinely employs people beyond a single director, and pays employer National Insurance on their wages [15].
How CIS set-off and Employment Allowance meet on the EPS
The reason CIS and Employment Allowance get confused is that both surface on the same submission: the Employer Payment Summary, or EPS. A construction company that is both an employer and a CIS subcontractor uses the EPS to handle two separate adjustments in the same place [16].
The first adjustment is the CIS set-off. A company subcontractor that has suffered CIS deductions can offset those deductions against the amounts it owes for PAYE tax, National Insurance, student loan repayments and its own CIS deductions from subcontractors [17]. The company reports the CIS deductions suffered on its EPS and reduces the payment it makes to HMRC accordingly. Where the deductions suffered exceed the liability in a month or quarter, the excess is carried forward to future periods [18].
The second adjustment is the Employment Allowance claim, which is also signalled on the EPS at the start of the claim [19]. Because they share the submission, it is easy to assume the two interact. They do not. Employment Allowance reduces the employer National Insurance figure before any CIS set-off is applied, and the CIS set-off then reduces the net cash the company hands to HMRC. Payroll software that holds the HMRC Recognised badge builds both adjustments into the EPS automatically, so the employer submits one accurate figure rather than reconciling two systems by hand [20].
A worked example for a construction employer
Consider a limited company that fits and installs kitchens. It employs three staff on PAYE, works as a subcontractor for larger builders, and suffers CIS deductions on its own invoices. The company is registered for CIS at the standard rate, so main contractors withhold 20% from its labour payments [21].
In a given month the company's payroll produces the figures in the table below. They are illustrative and rounded.
| Item | Amount |
|---|---|
| PAYE tax deducted from employees | £1,800 |
| Employee National Insurance | £900 |
| Employer National Insurance (before allowance) | £1,100 |
| Less Employment Allowance used this month | £1,100 |
| CIS deductions suffered as subcontractor | £2,400 |
The employer National Insurance of £1,100 is offset by Employment Allowance, reducing that element to nil until the £10,500 allowance is used up [22]. The remaining PAYE tax and employee National Insurance total £2,700, against which the company sets off the £2,400 of CIS deductions it has suffered [23]. The company therefore pays HMRC only £300 for the month, and reports both the allowance and the CIS set-off on its EPS. A construction firm handling this volume of adjustment usually routes payroll and CIS through an HMRC-recognised payroll platform rather than tracking the running figures on a spreadsheet.
Why subcontractor status matters to the numbers
The CIS rate a business suffers has a direct effect on its cash position, which is why gross payment status is worth understanding alongside Employment Allowance. A registered subcontractor loses 20% of each labour payment to withholding until it reclaims the excess, whereas a subcontractor with gross payment status keeps 100% and settles its liability later [24].
For a company that also employs people, the interaction with payroll matters. A subcontractor company suffering heavy CIS deductions can find those deductions exceed its whole PAYE and National Insurance bill, in which case Employment Allowance simply speeds the point at which the company moves into a repayment position [25]. Limited companies that end the year with unused CIS deductions can claim a repayment from HMRC once the final EPS for the tax year has been submitted [26]. The mechanics of the underlying employer charge are set out in more detail in this employer National Insurance guide, and the broader scheme is covered in this construction payroll and CIS overview.
Getting both right in payroll
Construction employers carry a heavier compliance load than most, because they operate PAYE, Real Time Information and CIS at the same time [27]. Every payday the company must submit a Full Payment Submission for its employees, and every month it must submit an EPS carrying the CIS set-off and, where claimed, the Employment Allowance indicator [28].
Errors tend to appear where the two systems meet. Claiming Employment Allowance while ineligible, or setting off CIS deductions the company has not actually suffered, both produce a mismatch that HMRC reconciles against its own records [29]. Because construction accounts for a large share of the 1,418,000 employers benefiting from Employment Allowance, getting the interaction right at scale is a real workload for bureaux [30]. Firms managing dozens of construction clients often rely on payroll for SMEs that computes the CIS set-off and the allowance together on each EPS.
Records and deadlines a construction employer must keep
A construction employer that claims Employment Allowance and operates CIS carries two reporting calendars, and missing either one attracts penalties. The CIS side runs on a monthly cycle: a contractor must file a CIS return by the 19th of each month, covering payments made to subcontractors in the tax month ended on the 5th, and must file even when no payments were made unless the scheme is treated as inactive [36]. The PAYE side runs on the payday cycle for the Full Payment Submission and the monthly cycle for the EPS.
Payments to HMRC follow their own deadline. A construction employer must clear the balance of PAYE tax, National Insurance and net CIS deductions by the 22nd of the month where paying electronically, or the 19th where paying by post [37]. Because Employment Allowance and CIS set-off both reduce that balance, the figure the employer actually pays can be materially lower than the headline liability, which makes an accurate EPS essential.
Record-keeping underpins all of it. A contractor must keep records of the gross amount paid to each subcontractor, the cost of materials, and the deductions made, and a subcontractor company must keep evidence of the CIS deductions it has suffered to support its EPS set-off [38]. HMRC can ask to see these records, and a set-off claimed without supporting deduction statements is the kind of mismatch that triggers a query. Payroll teams handling this alongside the allowance benefit from software that stores the CIS statements against each EPS automatically rather than in a separate folder [39].
Conclusion
Employment Allowance and the Construction Industry Scheme are separate systems that happen to meet on the same monthly submission. CIS deducts advance tax from payments between construction businesses, while Employment Allowance reduces the National Insurance an employer pays on its own staff. A construction company can benefit from both, provided it employs people beyond a single director and meets the allowance eligibility rules, and the two adjustments are reported side by side on the Employer Payment Summary without ever interacting directly.
For a construction business, the practical work is keeping the two straight: claiming the allowance where it applies, setting off only the CIS deductions actually suffered, and submitting one accurate EPS each period. As payroll and CIS reporting continue to converge inside single submissions, the direction of travel is towards systems that calculate both in the background, leaving the employer to focus on the build rather than the reconciliation.
Frequently asked questions
Can a CIS subcontractor claim Employment Allowance?
A subcontractor can claim Employment Allowance only if it is an employer that pays secondary Class 1 National Insurance on its own staff and meets the eligibility rules [31]. A limited company subcontractor with employees can usually claim, but a self-employed sole trader with no employees has no employer National Insurance to reduce and cannot claim.
Does Employment Allowance reduce CIS deductions?
No. Employment Allowance reduces an employer's secondary Class 1 National Insurance only [32]. CIS deductions are a separate advance payment of a subcontractor's tax and National Insurance, and they are handled through CIS set-off on the Employer Payment Summary, not through the allowance.
How does a construction company reclaim CIS deductions it has suffered?
A company sets off the CIS deductions it has suffered against the PAYE, National Insurance, student loan and CIS amounts it owes, reporting the set-off on its monthly Employer Payment Summary [33]. If the deductions suffered exceed the liability, the excess carries forward, and any balance left at the end of the tax year can be claimed as a repayment from HMRC.
Can a company claim Employment Allowance and set off CIS deductions in the same month?
Yes. The two are independent adjustments that both appear on the Employer Payment Summary [34]. Employment Allowance reduces the employer National Insurance figure, and the CIS set-off then reduces the net amount the company pays to HMRC, with no direct interaction between them [35].
