Construction Industry Tax FAQ 2026
Everything Contractors & Subcontractors Need to Know
The construction industry has its own set of tax rules, including Construction Industry Scheme (CIS) deductions, capital allowances, VAT rules, and payroll obligations. Whether you’re a sole trader working on-site or running a growing construction company, understanding these rules is essential to avoid penalties and keep more of your earnings.
Below are some of the most common tax questions construction professionals ask in 2026, with clear and practical answers.
1. Do CIS deductions apply differently for sole traders and limited companies?
No — the CIS deduction rates are the same regardless of business structure:
- 20% for registered subcontractors
- 30% for subcontractors who are not registered
However, the way CIS deductions are reclaimed differs.
Sole Traders
CIS tax deducted is claimed back through the Self Assessment tax return. It reduces the overall tax bill and may result in a refund.
Limited Companies
Companies reclaim CIS deductions monthly through payroll using an Employer Payment Summary (EPS). These deductions offset PAYE and National Insurance liabilities.
Pro Tip:
If your company is registered as a CIS subcontractor, make sure your payroll system is set up correctly to report CIS suffered — otherwise you could miss reclaiming significant amounts of tax.
2. Can I still claim the Super Deduction for equipment or machinery?
No. The Super Deduction ended on 31 March 2023.
However, businesses can now claim Full Expensing, which provides 100% tax relief on qualifying new plant and machinery purchased by companies.
Alternatively, businesses can use the Annual Investment Allowance (AIA) for immediate tax relief on qualifying assets.
3. What tax reliefs are available now for buying vans, tools, or equipment?
For the 2025/26 tax year, construction businesses can claim several types of capital allowances.
Full Expensing (100%)
Available for limited companies purchasing new plant and machinery, such as:
- Diggers and construction equipment
- Scaffolding
- Power tools and machinery
- Commercial vehicles like vans
50% First Year Allowance
Applies to special rate assets, including:
- Electrical systems
- Heating or ventilation systems
- Integral building features
Annual Investment Allowance (AIA)
- Up to £1 million per year
- Available to sole traders, partnerships, and companies
- Applies to new and second-hand equipment
Pro Tip:
Second-hand equipment may still qualify for 100% relief through the AIA, even if it does not qualify for Full Expensing.
4. When do I need to register for CIS?
You must register for the Construction Industry Scheme (CIS) if:
- You pay subcontractors for construction work (contractor), or
- You carry out construction work for a contractor (subcontractor).
Contractors must register before hiring subcontractors, and subcontractors should register to avoid the 30% deduction rate.
HMRC defines construction work broadly, including:
- Groundworks
- Demolition
- Roofing
- Bricklaying
- Decorating
- Site preparation
5. Should I operate as a sole trader or limited company in construction?
This depends on income level, liability concerns, and long-term business plans.
| Sole Trader | Limited Company |
|---|---|
| Easier and cheaper to set up | More tax-efficient once profits grow |
| Income taxed at personal tax rates | Pays corporation tax (up to 25%) on profits |
| Unlimited personal liability | Limited liability protection |
| Suitable for smaller operations | Better for scaling or hiring staff |
Pro Tip:
Many subcontractors start as sole traders and incorporate once profits increase or liability protection becomes more important.
6. What business expenses can construction workers claim?
Allowable expenses typically include:
- Tools and equipment
- PPE and safety clothing
- Repairs and maintenance of equipment
- Trade subscriptions (e.g. FMB, Checkatrade)
- Mileage or business vehicle costs
- Mobile phone used for work
- Insurance (public liability, tools cover)
- Accountancy fees
- Training related to your current trade
Always keep receipts and records, as HMRC may request evidence if your tax return is reviewed.
7. Can I reclaim VAT as a construction business?
Yes. If your business is VAT registered, you can reclaim VAT on business purchases such as:
- Materials and building supplies
- Tools and equipment
- Vehicle servicing
- Subcontractor services
- Fuel and travel costs (with proper records)
Be aware that VAT rules change for certain construction work, such as:
- New build housing
- Zero-rated projects
- Domestic reverse charge for construction services
Professional advice is recommended to ensure VAT is handled correctly.
8. Do construction workers need to file a Self Assessment tax return?
Yes — if you are self-employed in construction, you must submit a Self Assessment tax return each year.
Important deadlines:
- 31 January – online tax return deadline
- 31 October – paper return deadline
- 5 October – deadline to register for Self Assessment after starting self-employment
9. How does payroll work for construction companies?
If your company employs staff or pays directors a salary, you must operate PAYE payroll.
This involves:
- Registering as an employer with HMRC
- Submitting Real Time Information (RTI) each payday
- Paying PAYE and National Insurance by the 22nd of each month
Companies reclaiming CIS deductions must also submit an Employer Payment Summary (EPS) to offset CIS suffered against payroll liabilities.
10. What happens if I overpay tax through CIS?
Overpayments are common in construction.
Sole Traders
Any excess CIS tax deducted is refunded once the Self Assessment return is submitted.
Limited Companies
CIS deductions offset PAYE/NIC liabilities through payroll. Any surplus may be:
- Refunded by HMRC, or
- Carried forward to future periods.
Delays often occur when companies fail to submit their EPS correctly, so accurate payroll reporting is essential.
Need Help Navigating Construction Tax?
At Merranti Accounting, we specialise in helping construction professionals — from sole traders to large contractors — stay compliant, reduce tax liabilities, and improve cash flow.
We can help with:
- CIS compliance and tax refunds
- VAT advice for construction businesses
- Capital allowances and equipment purchases
- Choosing the most tax-efficient business structure
📞 Book your FREE initial consultation today
📞 Call us on 01342 836 557
📧 Email contactus@merranti.com
Let’s build your business on a stronger financial foundation.
