Key points
- Employees are paid through PAYE. Self-employed subcontractors in construction are paid under CIS.
- Which applies depends on the worker’s employment status, not on what the contract calls them.
- Treating an employee as self-employed can lead to tax, National Insurance and employment rights liabilities.
Two ways to pay
Under PAYE, the employer deducts income tax and National Insurance from an employee’s pay and reports it to HMRC in real time. The employee gets employment rights such as holiday pay, sick pay and pension auto-enrolment.
Under CIS, a contractor deducts 20% or 30% (or nothing, with gross payment status) from the labour part of a self-employed subcontractor’s payment. The subcontractor settles their own tax through self assessment and is responsible for their own holiday and pension.
Employment status decides
Whether a worker is employed or self-employed depends on how the work is really done. Factors include:
- Control: who decides how, when and where the work is done.
- Substitution: whether the worker can send someone else to do the job.
- Financial risk: whether the worker can make a loss or a profit, and provides their own tools and materials.
- Mutuality of obligation and how integrated the worker is in the business.
Checking status
HMRC’s Check Employment Status for Tax (CEST) tool gives a view based on your answers. Record how you reached your decision and review it if the way someone works changes.
The risk of getting it wrong
If HMRC decides someone paid under CIS was really an employee, the business can face unpaid PAYE income tax and National Insurance, interest and penalties. The worker may also be entitled to employment rights they were not given.
How Orca helps
Orca records each worker’s status and business details, pays employees and subcontractors under the right rules in the same weekly cycle, and keeps the evidence together, so the way each person is paid is consistent and explainable.
Questions
Can a worker choose to be paid under CIS?
No. CIS is for genuinely self-employed subcontractors. Employment status depends on how the work is done, not on preference.
What is CEST?
HMRC’s Check Employment Status for Tax tool, which gives a view on whether a worker should be treated as employed or self-employed for tax.
Official sources
This guide is general information, not legal or tax advice. Rules change: check the official sources and take advice on your own situation.