Making Tax Digital for CIS Subcontractors: How to Record Income, Expenses and CIS Deductions

If you’re a self-employed builder, carpenter, electrician, plumber or other Construction Industry Scheme (CIS) subcontractor, keeping track of your income and tax deductions can sometimes be confusing.

When a contractor deducts CIS tax before paying you, the amount arriving in your bank account is less than the amount you’ve actually earned.

With Making Tax Digital (MTD) for Income Tax now being introduced, it’s becoming increasingly important to keep accurate digital records of your earnings, business expenses and CIS deductions.

The good news is that Making Tax Digital doesn’t have to mean complicated bookkeeping or expensive accounting software.

In this guide, we’ll explain how CIS subcontractors can record their income and expenses correctly, understand CIS deductions, and prepare their bookkeeping for Making Tax Digital.

At MTD Trade Books, we specialise in straightforward bookkeeping for self-employed builders and tradespeople, with introductory ongoing bookkeeping from £20 per month and eligible catch-up bookkeeping from £99.

What Is Making Tax Digital for CIS Subcontractors?

Making Tax Digital for Income Tax is HMRC’s system requiring certain self-employed people and landlords to keep digital records and send regular updates using compatible software.

For CIS subcontractors who fall within the rules, this means keeping digital records of their self-employed income and expenses and sending quarterly updates to HMRC.

The introduction is being phased in according to qualifying income:

• From 6 April 2026: Qualifying income over £50,000.
• From 6 April 2027: Qualifying income over £30,000.
• From 6 April 2028: Qualifying income over £20,000.

Qualifying income generally means your gross income from self-employment and property before deducting business expenses.

It isn’t the same as your taxable profit, and CIS deductions don’t reduce your gross income for this purpose.

Whether you need to join in a particular year depends on the relevant earlier tax year’s qualifying income and any applicable exemptions.

For more information about who must join, read:

Do CIS Subcontractors Have to Use Making Tax Digital?

How Should CIS Subcontractors Record Their Income?

One of the most important things to understand is the difference between your gross earnings and the amount actually paid into your bank account.

When you’re working under CIS, the contractor may deduct tax from the labour element of your payment before paying you.

For example, imagine you’ve completed work for a contractor and the payment details are:

• Gross labour payment: £2,000
• CIS deduction at 20%: £400
• Net amount received: £1,600

Although only £1,600 reaches your bank account, your gross labour income is £2,000.

The £400 deducted under CIS is an advance payment towards your tax and National Insurance liabilities, where applicable.

Your bookkeeping needs to record the gross income and CIS deduction correctly.

If you simply record the £1,600 bank receipt as your total earnings, your income records could be understated.

This is particularly important when calculating qualifying income for Making Tax Digital.

How Do CIS Deductions Work?

Under the Construction Industry Scheme, contractors normally deduct tax from payments to registered subcontractors unless the subcontractor has gross payment status.

The usual deduction rates are:

• 20% for subcontractors registered with HMRC for CIS.
• 30% for subcontractors who aren’t registered or whose details cannot be verified as registered.
• 0% for subcontractors with approved gross payment status.

These deductions are generally calculated on the relevant labour payment after excluding VAT and qualifying amounts for materials and certain other costs.

For example, suppose a subcontractor invoices a contractor for:

• Labour: £1,500
• Qualifying materials: £500
• Total before VAT: £2,000

If the subcontractor is registered under CIS at the 20% rate and the materials qualify for exclusion, the CIS deduction would normally be calculated on the £1,500 labour element.

That gives:

• CIS deduction: £300
• Amount payable before any VAT adjustment: £1,700

The contractor should provide a payment and deduction statement showing the relevant details.

Keep these statements because they provide evidence of the CIS tax deducted from your payments.

What Records Should CIS Subcontractors Keep?

If you’re self-employed, you should keep accurate records of the money your business receives and spends.

For CIS subcontractors, important records include:

• Invoices issued to contractors and private customers.
• Gross payments for work completed.
• CIS payment and deduction statements.
• Business bank transactions.
• Receipts for materials and tools.
• Fuel and allowable vehicle expenses.
• Business insurance and relevant subscriptions.
• Payments for equipment and other business costs.
• Any relevant VAT records if VAT-registered.

Not every expense is automatically tax-deductible. The correct treatment depends on the type of expense and your circumstances.

Good recordkeeping makes it easier to check your accounts, prepare tax information and identify mistakes before they become bigger problems.

Which Expenses Can CIS Subcontractors Claim?

Self-employed CIS subcontractors can generally claim allowable expenses incurred wholly and exclusively for their business, subject to HMRC’s rules.

Common examples include:

Tools and Equipment

Tools, work equipment and certain protective clothing may qualify for tax relief, although larger equipment purchases can have different tax treatment.

Materials

Materials purchased for jobs may be allowable business costs.

Make sure you record the purchase properly, especially if the materials are included in amounts invoiced to contractors.

Vehicle and Travel Expenses

Business-related vehicle expenses may qualify for relief.

Depending on your circumstances, you may use allowable actual costs or simplified mileage expenses.

Ordinary home-to-work travel to a permanent workplace is generally not allowable, and travel rules can be more complicated for subcontractors working at different sites.

Insurance and Professional Costs

Business insurance, certain professional fees and relevant business subscriptions may qualify.

Phone and Internet

The business proportion of phone and internet costs may be allowable.

If you use the same phone for personal and business purposes, you should only claim the appropriate business element.

Keeping these expenses organised throughout the year can help ensure your records are accurate.

Should CIS Subcontractors Use a Separate Business Bank Account?

Although a sole trader isn’t generally legally required to have a separate business bank account, using one can make bookkeeping much easier.

For example, imagine your personal and business transactions are all mixed together.

You might have payments from contractors alongside supermarket shopping, household bills, personal transfers and business expenses.

Sorting everything out at the end of the year can become time-consuming.

A separate business account helps you keep your records clearer.

It can also make it easier to connect your account to bookkeeping software such as FreeAgent.

Some qualifying business bank accounts provide FreeAgent without an additional software subscription.

We’ve explained this in our guide:

FreeAgent for Builders and Tradespeople: How to Get MTD Bookkeeping Software for Free

Can FreeAgent Help CIS Subcontractors with Making Tax Digital?

FreeAgent is cloud-based accounting software that can help self-employed people organise their business finances.

For CIS subcontractors, FreeAgent includes features that can help with:

• Recording business income and expenses.
• Importing transactions from connected bank accounts.
• Creating invoices