Self-Employment Tax for Tradespeople: CIS, National Insurance & Allowable Expenses

Summary

Understanding your tax obligations as a self-employed tradesperson is fundamental to running a sustainable business. Many tradespeople leave significant money on the table by not claiming all allowable expenses, or face unexpected bills by not saving adequately for their January Self Assessment payment. The basics are not complicated, but the details matter.

For those working within the Construction Industry Scheme, tax is partially managed at source — but this does not remove the obligation to file a Self Assessment return. CIS deductions are credited against your overall tax bill; if deductions exceed your liability, you receive a refund. Understanding CIS is particularly important for subcontractors: verifying your registration status can mean the difference between 20% and 30% deduction rates.

National Insurance changes in recent years have affected the cost of self-employment significantly. Class 2 NI (previously a flat weekly charge) is now effectively included within Class 4 for many self-employed people [verify current Class 2 position after 2024 Budget]. Staying current on these changes is part of managing your finances as a sole trader.

Key Facts

• Register for Self Assessment — by 5 October after your first year of self-employment; penalty for late registration
• Tax year — 6 April to 5 April the following year
• Payment on Account — if your tax bill exceeds £1,000, HMRC requires payments on account (50% of prior year bill) in January and July
• Personal Allowance (2025/26) — £12,570 tax-free [verify current figure]
• Basic rate Income Tax — 20% on profits from £12,571 to £50,270 [verify current bands]
• Higher rate — 40% on profits from £50,271 to £125,140 [verify current bands]
• Class 4 NI (2025/26) — 6% on profits between £12,570 and £50,270; 2% above £50,270 [verify current rates]
• Class 2 NI — check current status following recent reforms; previously £3.45/week flat rate [verify current position]
• CIS deduction — verified subcontractor — 20% deducted from labour element of payments
• CIS deduction — unverified — 30% deducted; verify with HMRC to reduce to 20%
• CIS gross payment status — available once verified; no deduction at source; must apply and meet thresholds
• VAT registration threshold — £90,000 taxable turnover in a rolling 12-month period [verify current threshold]
• Flat Rate Scheme — available to VAT-registered businesses with turnover under £150,000; may reduce VAT admin

Quick Reference Table

[All rates and thresholds should be verified against current HMRC guidance — these are indicative 2025/26 figures]

Detailed Guidance

Setting Up for Self Assessment

When you start self-employment, register with HMRC online as soon as possible. You will need:

• Your National Insurance number
• Your start date of self-employment
• The nature of your trade (e.g. "plumber and heating engineer")

HMRC will issue you a Unique Taxpayer Reference (UTR). Keep this safe — you need it for CIS registration, VAT registration, and every Self Assessment return.

Save from day one. A rule of thumb: set aside 25–30% of every payment received in a dedicated savings account for tax and NI. This prevents the January tax bill being a crisis.

The Construction Industry Scheme (CIS)

CIS is a tax scheme specific to construction. Contractors (anyone who pays subcontractors for construction work) must register as CIS contractors and deduct tax from payments to subcontractors.

As a subcontractor:

• Register with HMRC as a CIS subcontractor — you should do this before working for any CIS contractor
• Provide your UTR to each contractor you work for
• The contractor verifies you with HMRC; if verified, they deduct 20% from the labour element of payments
• If not verified (e.g. unregistered), the deduction is 30%
• You receive a CIS payment statement each month from the contractor showing deductions
• Deductions are credited on your Self Assessment return

What is deducted? CIS applies to the labour element only. If you supply materials, those are excluded from the deduction. For example: if you invoice £1,000 including £400 labour and £600 materials, CIS applies to £400 only (deduction = £80 at 20%, not £200).

Gross payment status: Once you have traded for 12 months, have a compliant tax record, and your turnover meets the threshold, you can apply for gross payment status — meaning no deductions are made and you pay all tax via Self Assessment. Most established subcontractors aim to achieve this. HMRC can remove gross payment status for non-compliance.

Monthly returns (for contractors): If you pay subcontractors, you must file a monthly CIS return with HMRC by the 19th of the following month. Failure to file is penalised. If you have no subcontractors in a month, file a nil return.

Allowable Expenses — What Can I Deduct?

Allowable expenses reduce your taxable profit. The key rule is that an expense must be "wholly and exclusively for the purpose of trade." Many tradespeople claim too little:

Clearly allowable:

• Tools and equipment (can be claimed in full as capital allowances under the Annual Investment Allowance)
• Van or work vehicle running costs: fuel, insurance, servicing, MOT, road tax
• Vehicle lease payments
• Work clothing and PPE (not ordinary clothing you could wear elsewhere)
• Mobile phone bills (business portion — if 50/50 business/personal, claim 50%)
• Materials bought for jobs
• Trade body subscriptions (Gas Safe, NICEIC, NAPIT, CHAS, etc.)
• Advertising and marketing (website, leaflets, vehicle signage)
• Accountancy and bookkeeping fees
• Public liability and professional indemnity insurance premiums
• Training costs (to maintain or improve existing skills — not to enter a new trade)
• Bank charges on business accounts
• Small tools and safety equipment below the capital allowance threshold

The van mileage alternative: Instead of claiming actual van running costs, you can claim the approved mileage allowance: 45p/mile for the first 10,000 business miles, 25p/mile after that. This is simpler but often less advantageous for tradespeople with high annual mileage. You can only use one method — mileage rate or actual costs — and you cannot switch between them on the same vehicle.

Capital allowances: Tools, vans, and plant costing more than a de minimis amount (typically over £500) may need to be claimed as capital allowances rather than in-year expenses. The Annual Investment Allowance (AIA) allows 100% of qualifying capital expenditure to be deducted in the year of purchase, up to the AIA limit (currently £1,000,000 per year — far above what most sole traders spend). Use capital allowances to write off a new van or set of tools in the year you buy them.

Home office: If you work from home (e.g. quoting, admin, storing materials), you can claim a proportion of home running costs. HMRC allows a simplified flat rate of £10/month if you work from home 25–50 hours/month, or £18/month for 51–100 hours, or £26/month for over 100 hours. Alternatively, calculate actual proportional costs based on number of rooms used.

What's NOT allowable:

• Ordinary clothing (even if worn at work)
• Food and drink (except if genuinely buying food away from your base for work purposes — very limited)
• Personal mobile phone calls
• Travel from home to a regular place of work (commuting — not allowable)
• Fines and penalties (parking tickets, speeding fines)

National Insurance for the Self-Employed

Class 4 NI is calculated on your profit and paid alongside income tax through Self Assessment. Class 2 NI historically was a flat weekly amount; following 2024 budget changes, check HMRC's current guidance as this may have changed for 2025/26 [verify].

NI contributions count towards your State Pension entitlement. You need 35 qualifying years for the full State Pension (2025/26 rate: approximately £221.20/week full State Pension [verify]). Check your NI record on the HMRC app or Government Gateway — gaps can be filled voluntarily.

Self Assessment Filing

The Self Assessment tax return must be filed:

• Paper return: by 31 October after the end of the tax year
• Online return: by 31 January after the end of the tax year
• Payment deadline: 31 January (balancing payment + first payment on account for following year)

Penalties for late filing:

• 1 day late: £100 automatic penalty
• 3 months late: additional £10/day (up to £900)
• 6 months late: 5% of tax due or £300 (whichever greater)
• Further penalties at 12 months

Keep records for at least 6 years (HMRC can investigate up to 6 years back in standard cases; 20 years for serious fraud).

Frequently Asked Questions

Do I have to register for CIS even if most of my work is domestic?

If all your work is directly for domestic householders (not contractors), CIS does not apply — CIS applies to payments from contractors to subcontractors in the construction industry. If you occasionally work as a subcontractor to a contractor even on domestic projects, you should be registered. When in doubt, register — it avoids the 30% unverified deduction.

My contractor is deducting CIS from materials as well as labour. Is this correct?

No — CIS deductions apply to labour only, not to materials. You should invoice materials and labour separately. If a contractor deducts CIS from the full amount including materials, they are over-deducting. Request a corrected payment and statement. If they refuse, this can be addressed via HMRC's CIS dispute process.

How do I reclaim CIS deductions if they exceed my tax bill?

Through your Self Assessment return. Enter all CIS deductions from your monthly statements in the CIS box on the return. If deductions exceed your total tax and NI liability, HMRC will refund the difference — typically within 4–6 weeks of filing. File as early as possible if you expect a refund.

When should I switch to a limited company?

When your profits consistently reach approximately £35,000–£40,000/year, a limited company structure may save tax, primarily because corporation tax (25% [verify current rate] for profits up to £250,000) plus an optimal salary/dividend combination can be lower than income tax plus NI as a sole trader. There are also liability protection benefits. However, there are additional costs: accountancy fees increase significantly, and director responsibilities apply. See limited company for a full comparison.

I'm paying myself from a mix of CIS work and direct domestic jobs. How do I account for both?

Both types of income go on your Self Assessment return. Direct domestic jobs are recorded as trading income in the normal way. CIS work is also trading income, but you additionally record the CIS deductions made by contractors — these are offset against your total tax bill. Keep all CIS payment statements (issued monthly by each contractor) as evidence.

Regulations & Standards

• Income Tax (Trading and Other Income) Act 2005 — primary legislation for income tax on self-employment profits

• National Insurance Contributions Act 2002 and Social Security Contributions and Benefits Act 1992 — NI legislation for self-employed

• Finance Act 2004 (as amended) — CIS legislation, contractor/subcontractor definitions, deduction rates

• Taxes Management Act 1970 — Self Assessment obligations, penalties, record-keeping requirements

• VAT Act 1994 — registration threshold, scheme eligibility

• HMRC — Self Assessment for the self-employed — Official guidance

• HMRC — Construction Industry Scheme — CIS overview and registration

• GOV.UK — Allowable expenses for self-employed — What you can and cannot claim

• HMRC — Check your State Pension — NI record and State Pension forecast

• limited company — When and how to switch from sole trader to limited company

• vat for trades — VAT registration, CIS reverse charge, and VAT schemes

• payment terms — Invoicing practices that support accurate Self Assessment