my lad may have chance of some work subbing for a painter and decorator.  he’ll be self employed but apparently the company will take 20% from his wage for tax.  im sure its absolutely fine, but i cant understand why they would do that as they wouldnt be his employer, id have expected him to sort his own tax out at the end of the year, much like my wife who is also self-employed.

my confusion stems from ‘how do they know he’ll earn above the threshold by the end of the year’?  what if work dries up or hes laid off and doesnt earn £11,000 that year, will they have taxed him unnecessarily?

ive had this argument before and dont think we’ve ever resolved it.  im told that ‘you dont pay tax on the first £11,000 or so’ and people believe that they can earn whatever they like per month until they reach £11,000 then suddenly start paying tax.  i think thats bollocks, but not sure how its worked out.

say youre on £1,000 per month, so £12,000 per year.  you dont ‘not pay tax’ in january/ february/ march etc until the last month when you suddenly hit £11,000 and then start paying tax do you!  so only pay tax for 1 month per year….

im guessing that whatever you earn per month is multiplied by 12, and if itd work out at more than £11,000 youd pay tax on it, if it doesnt you dont.  but i dont know.  seems simpler to just work it out yourself at the end of the year and pay out what you owe.

thanks

Yes, they can and are expected by HMRC to deduct 20% at source.

He’ll get any overpaid tax back. Tell him to look at it as savings.

EDIT: Search for CIS on HMRC’s site.

yes, tax is calculated against an ‘annualised’ income so you pay it at a certain rate each month rather than in a rush at the end.

If he’s genuinely self employed he should be paid gross but I’m not familiar with the building industry – it may be that employers have to take basic tax to avoid people not declaring income. Perhaps he has to claim any tax overpayment back at the end of the year?

Yes, the deduction is correct – and compulsory.

Construction Industry Scheme

It’s to avoid the tax and NI evasion that occurred in the 1950s and 60s.

Google “The Lump” for more information, if you’re interested.

Depends on how this is being arranged. If he’s still on a payroll and PAYE is involved but it’s like a zero hour contract, then the company takes tax off at source. Technically he’s not self employed.

If he’s truly self employed and they are paying a fee (and he should be invoicing them for the work as a supplier), then they have nothing to do with income tax and NI. All down to him.

Edit: Ah, as above, construction industry subbing seems to have its own rules under CIS. I’d argue he’s not self-employed then but a sub-contractor employed by the contractor. Does he get holidays and sick benefit? Even government say no I feel this is wrong. If you’re treated like an employee for tax purposes you should get the full benefits of being an employee.

As for the thresholds. £1000 a month is taxed at 20% and then you reclaim it in a tax return if over. In normal employment tax codes would adjust it (so you’d end up taxed on £83.33 of £1000 to end up taxing £1000 out of £12,000) but looks like they go with a flat 20%.

As you say, it doesn’t work that you earn up to £11k and then start paying tax for the last month.

As above it will be through the cis scheme, all Labour payments will have tax deducted then once a self assement has been completed at the end of the tax year once tax and national insurance has been taken from what he has had deducted from his wage will be refunded.
If he doesn’t make £11000 a year it should all be refunded

The Construction Industry Scheme is there to prevent people building up large tax bills during the year. My main creditor deducts 20% off the Labour element of any invoice. I also make two payments on account in Jan and Jul (based on my sole trader profit) and have to claim back all my overpayments myself. It’s a pain in the beginning but you get used to it – and I look on it as a kind of annual savings scheme.

Oh and generally one-off non-deducted payments will be let go but if it’s the same main contractor paying him as a subbbie week after week, HMRC wouldn’t be too happy with them not deducting at source. To be honest, the fact that they are deducting shows that they’re being reasonably kosher with their tax affairs. I’d be more concerned if they weren’t deducting.

I used to work as a sub-contractor in the construction industry, my payments were always with tax deducted from the whole amount, i.e. no personal allowance, then I’d claim back the overpayment at the end of the financial year. I eventually got a 714 certificate which meant that the client would pay me gross and I’d deal with paying the tax later. I don’t know if that scheme is still in place.

Prior to getting the 714 I’d a “problem” in that my main client got into financial difficulties and stopped deducting the tax but told HMRC that he had. So let’s say £400 lump with 25% tax then I’d get £300 and he’d pay £100 to HMRC. Following his little fiddle, I still got £300 but he pocketed the £100 but I now owe HMRC the tax! The first I found out about it was getting a tax demand rather than a refund. That took a little sorting out 🙁

ok thanks, sort of getting my head around that and had a quick look at that CIS link.  dont immediately understand it all but will have another read through.

put my mind at rest over one thing tho please……  however it all pans out and whether he pays tax monthly and claims back, or pays everything at the end of the year, its not the case is it that you can earn £10,999 and pay no tax, or earn £11,001 and pay 20% tax on all of that?  thatd just be daft.

thanks

😀

No, hell only pay tax on anything over and above his Tax Free Allowance.

He should also make sure he’s at least paying minimum NI payments.

The tax rate system is incremental

The first 11500 is 0%, then until 45,000 it is 20%

So if you ear 11501 you pay the 20% on the 1 which is over the limit…

Now if they are deducting at source this means a refund as they will have taken 20% of the 11500

For example (ignoring NI for a moment), if he invoices 12k, they’ll deduct £2.4k, he’ll self assess which will mean he owes £400 tax, then get £2k back. (This is over simplified for clarity.)

He should also keep a record of ALL expenses incurred thru work.

Sadexpunk – if you earnt £11001 you’d pay tax on £1

or earn £11,001 and pay 20% tax on all of that?

No, 20% on anything over £11,000 – in this case £1

He’ll need to contact HMRC and register himself as self-employed so he can make NI contributions.

Sadx – make sure he gets some sort of confirmation of actual payment to hmrc.

Also, if mini sadx is any good and wants to help paint a flat in London in future let me know.  No dates planned yet but mid lets gets painted.

thats a lot clearer now, thanks a lot.

you don’t pay NI contirbutions monthly anymore, its all worked out yearly and added onto the tax payment.

Your lad will need to register for self employed and cis otherwise he won’t be in the register and have 30% deducted instead of the the standard 20%.  Once he submits his self assessment tax return he’ll be able to reclaim any overpaid tax. If you need help drop me a line

He will have to phone HMRC and register (could maybe do it online now) for CIS. He will have to get a UTR (unique tax reference) before doing any subbie work, i think. It’s been 8 years since i went through it all, so may be different now.

Edit: Beaten to it^^

Also make sure he gets a CIS deductions statement from the contractor. They are issued monthly and show the CIS deductions taken by the contractor. They are based on payments (not invoice dates) received between 6th and 5th of the month following.  They’re are some unscrupulous contractors who take the deductions from a subbie then not pay them over to HMRC. Ensuring you have the statements enables you to prove to HMRC that you have suffered CIS deductions.

you don’t pay NI contirbutions monthly anymore, its all worked out yearly and added onto the tax payment.

ah is that right, didnt know that, id told him to make sure he pays his NI.  so does that mean he’d be docked 20-something percent instead of 20?

Your lad will need to register for self employed and cis otherwise he won’t be in the register and have 30% deducted instead of the the standard 20%.

yep, i know he’ll have to ring up about being officially self-employed, didnt know he also had to tell them itd be CIS, thanks.  and out of curiosity, if tax is 20%, why would anyone tax you 30% unless you tell them youre CIS?

looks like this CIS lark seems to have its own rules, taxing at source, 20/30%, ‘tell them youre CIS’ etc, why is this?

thanks a lot

He is not truly self employed if he is only working for the one company.

There are several criteria he needs to meet to be self employed in the construction industry.

These include usually having financial risk, using own tools and vehicles etc, providing materials, and a few others that I can’t remember.

Not only should your son be cautious about this but also the contractor as he could be liable after the event for tax.

I would speak to an accountant that understands the CIS system.

yep, i know he’ll have to ring up about being officially self-employed, didnt know he also had to tell them itd be CIS, thanks. and out of curiosity, if tax is 20%, why would anyone tax you 30% unless you tell them youre CIS?

looks like this CIS lark seems to have its own rules, taxing at source, 20/30%, ‘tell them youre CIS’ etc, why is this?

When end your lad provides the contractor with his UTR number they will enter into HMRC online. If he is CIS registered it will tell the contractor to deduct 20%, if not 30%. It all goes back to tradesman working cash in hand, giving fictitious UTR numbers and lots of other tax evading scams. The 30% was equivalent to tax and NI but now acts as a deterrent for subbies to get themselves registered

Some really great advice on here. Restored my faith in the forum after getting depressed about the petty arguments on the EAU thread. I hope this helps your lad get sorted Sadexpunk, loads of information I never knew and I’ve been self employed for 25 years (not in construction).

Correct rob, excellent advice, thanks a lot chaps.

If he only work’s for companies that deduct tax at source  , then he’l be fine.  If however, he does his own work for private  client’s who pay him the full amount on his invoices.  Hmrc will use his overall turnover  and calculate his tax liability for the next tax year.  So he could if he’s not careful, he could end up with a surprise tax bill that has to be paid in advance.  A bookkeeper or an accountant will advise him about that .