How to Manage CIS in Xero or FreeAgent
If your limited company operates as a subcontractor in the construction industry, you may be familiar with the Construction Industry Scheme (CIS). But how does CIS affect your company’s payroll and PAYE obligations? And how do you manage it all in accounting software like Xero or FreeAgent? Here’s a quick guide to help clarify things.
CIS Deductions and Your Company
When you invoice a contractor for labour, they may deduct CIS tax at 20% (or 30% if you're not registered). These deductions are not personal tax—they’re advance payments toward your company’s tax obligations. If you have Gross Payment Status, no deductions are made.
Running Payroll and Paying PAYE/NI
As a director or employee of your limited company, you must run payroll and report it to HMRC using Real Time Information (RTI). This includes calculating and paying Income Tax and National Insurance (NI). Directors’ NI is calculated annually, which can differ from standard employee calculations.
Offset CIS Deductions Against PAYE
The CIS deductions your company suffers can be offset against your PAYE and NI liabilities. Each month, you submit an Employer Payment Summary (EPS) to HMRC, reporting the CIS tax deducted by contractors. HMRC then reduces your PAYE bill accordingly.
If your CIS deductions exceed your PAYE liabilities, you can either carry the excess forward or request a refund from HMRC.
Managing CIS and Payroll in Xero
1. Enable CIS in Xero
Go to Settings > Advanced > Financial Settings.
Turn on the Construction Industry Scheme (CIS) feature.
Select whether your company is a contractor, subcontractor, or both.
2. Record CIS Deductions
Enter bills from contractors, separating labour and materials.
Xero applies the correct CIS deduction rate automatically.
3. Submit CIS Returns
Go to Business > CIS Returns.
Review and submit the return to HMRC.
Generate and send Payment & Deduction Statements.
4. Run Payroll and Submit RTI
Process pay runs and submit Full Payment Submissions (FPS) to HMRC.
Submit an Employer Payment Summary (EPS) if no employees are paid.
5. Offset CIS Suffered
In Payroll > RTI Filings, select Update CIS.
Enter the CIS suffered amount to include in your EPS.
HMRC offsets this against your PAYE and NI liabilities.
Managing CIS and Payroll in FreeAgent
1. Enable CIS in FreeAgent
Go to Settings > Construction Industry Scheme.
Select ‘Set up CIS’ and confirm you’re a registered subcontractor.
Choose applicable CIS deduction rates.
2. Set Up Payroll (if applicable)
If running payroll, select ‘Yes’ to submitting RTI payroll.
Enter your Corporation Tax reference number.
Input your initial CIS balance (total deductions since the start of the tax year).
3. Record CIS Invoices
Create CIS invoices for the selected tax year (for internal records only).
Mark them as sent and add manual bank entries to reflect payments.
4. Run Payroll and Submit RTI
Prepare payslips under My Money > Payroll.
Submit FPS and EPS to HMRC directly from FreeAgent.
5. Offset CIS Suffered
Include CIS deductions in your EPS submission.
HMRC will offset these against your PAYE and NI liabilities.
Understanding how CIS interacts with payroll and PAYE is key to keeping your limited company compliant and financially efficient. Whether you use Xero or FreeAgent, both platforms offer tools to help you manage CIS deductions, run payroll, and stay on top of your HMRC obligations.
If you need help setting up CIS or payroll in your accounting software, or want to review your current setup, feel free to get in touch.