How to Record CIS Deductions for Making Tax Digital

If you work as a CIS subcontractor, the amount that lands in your bank account is often not the same as the income you need to record.

A contractor may deduct 20% CIS tax before paying you. Materials may be excluded from the deduction. And under Making Tax Digital (MTD), your records need to show the transaction correctly rather than simply treating the bank payment as your income.

Here is the simple way to understand it.

CIS deductions: a quick example

Imagine you send a contractor an invoice for:

It can be tempting to record £2,100 as your income because that is what arrived in your bank.

But that would miss part of the picture.

HMRC says a sole trader should report their total pay before CIS deductions as income, while the amount deducted by contractors is recorded separately as CIS deductions. The CIS deducted is essentially an advance payment towards your tax bill.

So in this example, you need records that make it clear that you earned £2,500 and that £400 has already been deducted under CIS.

For a broader overview of keeping your CIS records organised, read our CIS subcontractor bookkeeping guide.

Why materials matter under CIS

CIS deductions are not simply 20% of every invoice.

HMRC says contractors normally do not deduct CIS from certain amounts, including materials that the subcontractor has paid for directly. VAT and some other qualifying costs are also excluded from the CIS deduction calculation.

This is one reason it helps to keep labour and materials separate in your bookkeeping.

If everything is recorded as one net bank payment, it becomes much harder to see:

• what you actually earned
• what related to materials
• how much CIS was deducted
• what you actually received
• whether the contractor's deduction looks correct

Good CIS bookkeeping keeps those figures connected without treating them as the same thing.

How does this work with Making Tax Digital?

MTD for Income Tax requires affected sole traders to keep digital records and use compatible software to send quarterly updates to HMRC.

Quarterly updates are summaries of your digital income and expense records, not separate tax returns. HMRC's current guidance says the software adds together your digital records and sends totals for the relevant income and expense categories.

For CIS subcontractors, HMRC specifically says that CIS deductions need to be taken into account in quarterly updates, and notes that some software can handle CIS deductions automatically.

The important point is this:

Do not simply use the net amount arriving in your bank as your business income.

Your bookkeeping software needs to understand the difference between the income you earned and the tax already deducted from that income.

You can read more about Making Tax Digital for sole traders.

Does CIS reduce your MTD qualifying income?

This is another common source of confusion.

MTD qualifying income is based on your gross self-employment and property income before expenses, also referred to as turnover. It is not based on your profit or simply on the amount left in your bank account.

So having 20% deducted under CIS does not automatically reduce your qualifying income for MTD by 20%.

This matters because MTD for Income Tax currently applies in stages. Sole traders and landlords with qualifying income over £50,000 for 2024/25 started from 6 April 2026. The threshold becomes over £30,000 based on 2025/26 income for MTD from April 2027, and over £20,000 based on 2026/27 income for MTD from April 2028.

Keep your CIS statements

Your contractor must provide a payment and deduction statement showing what they paid you and what they deducted.

HMRC says you should keep these statements because they may be needed as evidence of the CIS tax deducted. If a statement is missing, you should ask the contractor for a replacement.

For day-to-day bookkeeping, it therefore makes sense to keep the contractor statement alongside the relevant income record rather than trying to reconstruct everything at the end of the tax year.

You should also keep records of your business expenses. Our guide to allowable expenses for sole traders explains what you may be able to claim.

What happens to CIS deductions at the end of the year?

CIS deductions are advance payments towards your tax.

Under MTD, HMRC may automatically add subcontractor CIS deduction information that it already holds to your tax return. You still need to check that the information is complete and correct before submitting the return.

This is another reason accurate CIS records matter throughout the year: you can compare your own records and contractor statements with the figures HMRC holds.

For more on the year-end process, see our guide to Self Assessment software for sole traders.

The easiest way to stay on top of CIS and MTD

CIS bookkeeping becomes much easier when your software understands that gross income, materials, CIS deducted and the net bank payment are different parts of the same transaction.

Kletta is built specifically for UK sole traders and CIS subcontractors. You can record gross labour, materials, CIS deducted and net paid, upload contractor statements and keep your digital records organised for MTD.

If you are comparing options, read our Best MTD Software for CIS Subcontractors guide.

Or see how Kletta works for CIS subcontractors.

FAQ

Do I record CIS income gross or net?

For a sole trader, HMRC says you should report your total pay before CIS deductions as income and record CIS deductions separately.

Are CIS deductions an expense?

No. CIS deducted by a contractor is an advance payment towards your tax, not an ordinary business expense.

Do CIS deductions need to be included when using MTD?

Yes. HMRC's MTD guidance specifically tells subcontractors to include CIS deductions as part of the MTD process.

Should I keep my CIS payment and deduction statements?

Yes. HMRC says you should retain them as evidence of deductions taken by contractors.