CIS refund for a sole trader: £6,000 deducted, and the profit level where you stop getting money back

A subcontractor works through the year and sees 20% come off every payment. By October they are asking when it comes back. There is a belief on sites that you "claim it back" with a form. For a sole trader, there is a simpler answer, and a sum.

How the money comes back

GOV.UK says that at the end of the tax year a sole trader sends in a Self Assessment return, reports the gross payments as income and the total of deductions as CIS deductions. HMRC works out the tax and National Insurance owed and takes off the deductions. If more has been deducted than is owed, HMRC repays the difference.

In-year refunds are narrower than people think. The page describes a refund during the year only where the business stops trading: a sole trader uses form CIS40 for deductions already paid in the tax year. A limited company works differently: the deductions are set against its PAYE through the Employer Payment Summary, and any left over after the year end can be claimed back.

A sole trader who still trades therefore waits for the return. The return is due by 31 January after the tax year, and the page says any tax still owed is paid by 31 January too.

What comes back: three profit levels

Assume labour invoices of £30,000, so 20% deducted is £6,000. Income tax is worked at 20% on profit above a £12,570 personal allowance, and Class 4 National Insurance at 6% on profit above £12,570 up to £50,270. These are the figures in our Class 2 and Class 4 guide. I assumed the standard allowance and basic rate and did not re-read the income tax rates page today.

Where the refunds stop

Above the allowance each extra pound of profit carries 26% (20% tax and 6% Class 4). The deduction of £6,000 is used up when 26% of the profit over £12,570 equals £6,000. That is £23,077 over, or a profit of about £35,647. A subcontractor below that gets money back; above it, the 20% held back did not cover the bill.

That is why the same 20% deduction feels like a refund to one tradesperson and a shortfall to another. It is a payment on account, not the tax. Our guide to the January tax bill for CIS subcontractors shows what happens when it falls short.

What this means for a tradesperson

• Keep the statements. Contractors give a monthly statement of payments and deductions. The return needs the total, so file them as they arrive.
• Do not wait on an unregistered rate. The deduction is 30% for an unregistered subcontractor, and 0% with gross payment status; the tests are in our gross payment status guide.
• Know your own break-even. Take last year's profit, find 26% of the part over £12,570 and compare it with the total deducted.

I did not read the page's rules on a partnership return, on late returns, or on payments on account, which can change the cash due in January.

Overlyft builds AI staff who join your trades firm's office, add up each month's CIS statements as they come in, set the running total against your profit so far and tell you whether a refund or a bill looks likely, for you or your accountant to check.

This is general information, not tax advice. Check GOV.UK and your own figures, or ask your accountant.