CIS Tax Repayments Explained

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How do I get my tax ‘rebate’? (CIS)

This is a question we get asked a lot. Below we will explain all. If this is all too much to read, there is a ‘TL;DR’ (‘Too long; Didn’t read’ – see we are ‘down’ with the internet speak) summary version at the bottom.

To begin, ‘how do I’ is the wrong question to ask. We see adverts from businesses all the time saying ‘Get your tax repayment’, but the first question should be ‘am I due a tax repayment?’

The key point to remember with tax repayments is that you will only be due a repayment if you have paid some tax in the tax year, and overpaid tax. A tax year runs from 6th April to 5th April each year. We often hear people say ‘well I must be due a tax repayment I haven’t worked all year’, but there is the problem, if you haven’t worked, or earned over a certain amount, you normally won’t have paid any tax to reclaim. That said, in the CIS / construction industry it is a fairly common occurrence to have both paid tax and overpaid, so it has become almost an expectation for people who are CIS subcontractors.

Why would I be due a repayment?

In short, because you paid too much tax in the tax year. Here we show you why.

Generally you will have been deducted 20% from all of your labour income under the CIS scheme. This has been handed over by your contractor to HM Revenue & Customs on your behalf.

You can earn an amount each year, currently £12,500 before you pay income tax. However, you will of been deducted 20% on ALL of your CIS Income. As a result, it becomes fairly standard in the CIS industry to have overpaid tax.

With the above in mind, what it doesn’t take into account however is any National Insurance (NI) due on your income. If NI is due, this will reduce your repayment.

There is a simple example at the bottom of how this works.

How do I increase my repayment?

Another question we get asked a lot. The simple answer is you don’t. You get the tax back that you have overpaid – it’s just maths. That said, a good accountant will help you ensure you have captured all your expenses and claimed all the allowances due, but ultimately you only get back what you are rightly due. Your repayment will increase in the example the more expenses you have because it effectively reduces your income.

So I should just buy a new van or load of tools each year and pay no tax / get a larger repayment?

It is simple answer time again, no you shouldn’t. Because of the way it works, in easy to picture figures, for every £100 you spend you are saving around £20 in tax. So drop £10k on a van and you may only save around £2000 tax. The consideration should be, if you need a van or some tools soon anyway, try and buy them before the year end. The ‘worse’ time to buy something like this would be 7th April as you have to wait for longer for tax relief.

But my mate gets double that?

Ah yes, so we hear regularly 🙂 There are a few things in play here:

  1. He could be telling ‘porky pies’ (we all have that mate) or just miss-understanding
  2. He has more expenses than you, or is at least claiming more
  3. He had more tax deducted than you
  4. You earn more than he does and your NI bill has reduced your repayment more than his
  5. He has just spent that £10k on a van to achieve another £2000 in his repayment . . (For example)

The list could go on – the bottom line is without seeing his tax return and / or accounts you will never know why.

Ok, I get it, so what do I need to do to get my repayment?

As the current system stands, you (or your accountant) will need to submit a Self Assessment Tax Return. This can be submitted after the end of the tax year, but needs to be done before 31st of January following the end of the tax year. For example, your 2020 Tax Return (for tax year 6th April 2019 – 5th April 2020) will need to be submitted by 31st January 2021.

Once this return is submitted, you should receive your repayment in around 28 days depending on HMRC (sometimes it can be much quicker).

TL; DR (Too Long; Didn’t Read) Summary

To receive a tax ‘rebate’ (repayment) you will of had to actually pay tax at some point in the tax year.

Tax year runs 6th April to 5th of April the following year.

To claim your repayment you or your accountant will need to submit a Self Assessment Tax Return (currently). This needs to be done before 31st January each year (so year ending April 20 needs to be in by 31st January 2021)

Once the tax return is submitted between April – Jan your repayment should take around 28 days depending on HMRC lead time (can be quicker).

You are only due a repayment where you have paid too much tax. This is normally because you are deducted 20% on ALL of your CIS income, but are allowed to earn 11,500 (currently) a year before you should pay tax.

The tax deducted doesn’t take into account National Insurance due, so this reduces the repayment in most circumstances.

The more expenses you have, the more the potential repayment (as your taxable income is less), but remember you are really only saving around £20 for every £100 you spend.

Repayment Simple Example (Rounded):

CIS Income £21,000

Tax deducted by contractor £4,200

You were paid £16,800

Your actual tax bill is:

£21,000, less first £12,500 = £8,500

Tax is 20% of this = £1700

Tax paid £4200

Repayment due before NI (National Insurance) = £2500

Now, National Insurance  is due on amounts over £8632 per year

CIS Income £21,000, less first £8632 = £12,368

NI (Class 4) is 9% of this = £1113

You also currently have a small ‘fixed’ amount to pay (‘Class 2 NI’) of £156

Total NI due = £1269


Tax due = £1700

NI due = £1269

Total due = £2969

Less tax paid of £4200

Total repayment = £1231

At certain higher earnings levels the NI and tax can exceed the amount deducted, and therefore you will receive a tax bill rather than a repayment.

If you need any further help with your own repayment or tax return, please give the team a call on 02392 240040, or email info@heelanassociates.co.uk

For further reading, be sure to check out our blogs on being a CIS Subcontractor / CIS Contractor.