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How things with work with CIS

If you're a self-employed CIS subcontractor, your tax will be deducted at 20% of all your income. It won't take into account any of your personal allowance.

One of the reasons self-employed CIS subcontractors get an average tax rebate of £2000 is because of the personal income allowance which in 2017/2018 was £11500.

When you complete your tax return, this amount is deducted from your taxable income. As a result, because you have had tax deducted on all your income (rather than just your taxable income) you have paid too much tax so you are owed some money back.

To keep things simple we will not be including national insurance or expenses in these examples.

Let's say that you earned £15000, and you had tax deducted at 20% (£3000). Once your tax return is completed the personal income allowance (£11500) is now deducted from your taxable income. This leaves your taxable income at £3500, so if you're paying 20% tax on that figure, you should only have paid £700 pounds tax.

You're now owed the difference between how much tax has been originally deducted (£3000) and how much you should have paid (£700). This would lead to a rebate of £2300.

How things work with PAYE

PAYE employment does take these allowances into account when working out how much tax should be deducted.

PAYE income will look at your weekly/monthly pay work out how much they expect you to earn in the year, remove your personal allowances and then deduct what they believe to be the correct amount of tax.

For example, if you get paid £2500 per month HMRC will expect you to earn £30000 in a year. They will then deduct your personal tax allowance of £11500, leaving you with a taxable income of £18500. If your tax rate is 20%, you will need to pay £3700 tax for the year. They will then look at how often you get paid (weekly or monthly), and then deduct the correct amount of tax to make sure at the end of the year you have paid £3700 in tax.

This is why if you are just employed for the whole year you will generally pay the right amount of tax and there will be no tax rebate!

How things get confused when you have both CIS and PAYE

Problems start to appear when you have both self-employment (CIS) income and PAYE income. If we use the above figures and assume you have £30000 PAYE income, you have paid £3700 in tax, and you have also earned another £15000 income as self-employed.

Because you have already had the benefit of your personal allowance as its been accounted for on your PAYE income you have already paid the correct amount of tax, and your tax rebate maybe lower than you expected

Although you will still receive a tax rebate once we include your allowable Expenses albeit slightly less than you may of thought. For more info on how that works, see the expenses guide.

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