How to Manage Payroll for Subcontractors

Understanding the Role of Payroll Subcontractors

A payroll subcontractor is a self-employed specialist engaged by a main contractor to deliver specific project tasks—most often in construction. Rather than being a regular employee, a subcontractor operates as their own business, sometimes through a limited company or umbrella company. This flexible workforce model has distinct advantages for both contractors and subcontractors, but it also requires careful payroll and tax compliance management.

Freelancers, Subcontractors, and Payroll: Key Differences

While 'freelancer' and 'subcontractor' are sometimes used interchangeably, there are clear legal and tax differences:

• Freelancers typically work on small projects, invoice at milestones, and are often covered by the client’s insurance.
• Subcontractors handle larger, ongoing work, are more likely to use limited companies or umbrella arrangements, and must manage their own insurance and wider tax responsibilities.

Remember: If you’re hiring, subcontractor mistakes are rarely covered by your business insurance.

CIS Payroll: The Backbone of Construction Subcontracting

The Construction Industry Scheme (CIS) is central to how payroll for subcontractors operates, especially in the UK:

• Designed to prevent tax evasion and streamline payments.
• Contractors must register and verify every subcontractor’s Unique Tax Reference (UTR) with HMRC.
• Registered subcontractors are subject to a 20% CIS deduction, while unregistered ones face 30%. Qualifying large or compliant subcontractors can apply for 0% gross payment status.
• Deductions and payments must follow precise HMRC formulae and reporting schedules.

Suitable Work for CIS Payroll

• Site preparation, building, repairs, installation (electrical, heating), and post-construction site cleaning.
• Excludes professional services (e.g., architects), pure materials supply, and certain other roles.

Setting Up and Running Payroll for Subcontractors

The Essential Tasks for Contractors:

1. Register with HMRC as a CIS contractor.
2. Verify each subcontractor’s UTR online.
3. Establish the correct deduction rate.
4. Calculate CIS on the net invoice amount (after allowable materials/VAT).
5. Issue a Payment and Deduction Statement to every subcontractor by the 14th of each month.
6. Submit CIS300 returns to HMRC monthly (or quarterly, for smaller businesses).

Ensuring robust, clear records is not just best practice—it's your legal requirement.

CIS Deduction Calculation – Example

If a subcontractor invoices £1,000 and £200 is for materials, CIS applies to £800. Deduct 20% (£160), pay £840 to the subcontractor, and remit £160 to HMRC.

PAYE vs CIS Payroll – When To Use Each

Callout: Incorrectly classifying staff can lead to significant tax penalties. Review statuses regularly and consult HMRC guidance where necessary.

Compliance and Best Practice in Subcontractor Payroll

• Document everything: Keep payment, deduction, and verification records.
• Issue payment statements monthly: Details of deductions and net payment are not optional.
• Stay up-to-date: Frequent changes in HMRC regulations mean regular reviews are essential.
• Insurance: Insist on evidence of public liability insurance from all subcontractors. Your cover likely will not extend to them.
• Software can help: CIS payroll software automates verification, deduction calculations, payment, and HMRC reporting. Popular choices include Moneysoft Payroll Manager, BrightPay, and Wagemate.

"Accurate subcontractor payroll is the backbone of a compliant and efficient construction business."

Outsourcing and Payroll Software – Streamlining The Process

A robust payroll approach doesn’t mean extra admin headaches. Consider:

• Dedicated CIS payroll software: Automatically verifies, calculates deductions, processes payments, and files HMRC returns.
• Outsourcing payroll: Specialist firms will take over all setup, monthly submissions, and compliance checks.
• Integration with accounting packages: Many CIS solutions link to standard accounting/payroll programs for seamless financial management.

Call to Action

If you’re in the construction sector—contractor or subcontractor—review your payroll compliance today. Mistakes can lead to unnecessary costs or penalties. Where in doubt, seek advice from a qualified accountant or payroll specialist.

For full official guidance, visit:

• GOV.UK: The Construction Industry Scheme
• HMRC’s CIS340 Guidance Manual

Final Thoughts

By taking a disciplined, structured approach to subcontractor payroll—built on compliance, clear records, and the right technology—you safeguard both your business and your workforce. The effort you invest in correct payroll management delivers dividends in stability, reputation, and peace of mind.