Running a construction business in the UK means juggling many responsibilities—tight project deadlines, managing staff, and staying on top of your finances. Yet, one area that often gets pushed to the side is tax planning. The truth? Proactive tax management helps you stay compliant, reduce your tax bill, and plan for sustainable growth.
Whether you’re a subcontractor, sole trader, or run a limited company, this guide breaks down the key tax rules for 2025 and offers smart tips to stay ahead.
1. Picking the Right Business Setup
Before diving into tax-saving strategies, let’s talk structure. How your business is registered directly impacts your tax responsibilities:
- Sole Trader: Simple to set up, taxed through self-assessment.
- Partnership: Two or more owners share profits and file individual tax returns.
- Limited Company: Separate from its owners. Pays corporation tax; directors/shareholders pay tax on income and dividends.
Quick Tip: If your profits are growing, switching to a limited company may lower your overall tax burden.
2. Construction Industry Scheme (CIS) Made Simple
CIS is a system run by HMRC that affects most UK contractors and subcontractors in construction.
Contractors must:
- Register with HMRC
- Verify subcontractors
- Deduct 20% or 30% tax
- Submit monthly CIS returns
- Pay the tax to HMRC
Subcontractors should:
- Register under CIS
- Receive payments minus deductions
- Use these deductions toward their annual tax bill
Smart Move: Apply for gross payment status if you want to get paid in full without deductions—this improves cash flow.
3. Understanding VAT in Construction
VAT can get tricky depending on the type of work you do.
- 20% Standard Rate: Applies to most commercial jobs and maintenance work.
- 5% Reduced Rate: Covers certain home improvements and energy-saving installs.
- 0% VAT: Applies to new residential builds.
From 2021, Domestic Reverse Charge VAT rules apply:
- Subcontractors no longer add VAT to invoices
- Contractors handle the VAT accounting
Pro Tip: Not sure if reverse charge rules apply to your job? Get help—mistakes can lead to delayed payments or fines.
4. Claiming Business Expenses
Want to lower your tax bill legally? Claim every eligible business expense. Common deductions include:
- Tools and equipment
- Protective gear
- Travel and mileage
- Insurance
- Training costs
- Subcontractor fees
- Admin and home office costs
Important: Keep clear, organised receipts. Missing documentation is one of HMRC’s biggest red flags.
5. Payroll and CIS: Know the Difference
If you employ workers, you need to run PAYE:
- Deduct tax and National Insurance
- Provide payslips
- Submit real-time reports to HMRC
But don’t confuse this with CIS payments for subcontractors. They follow different rules.
Best Advice: Use software that handles both PAYE and CIS—or outsource payroll to reduce admin time.
6. Corporation Tax vs. Self Assessment
Your structure affects how you pay tax.
Limited Companies:
- Pay 25% Corporation Tax (from April 2023 for profits over £250,000)
- File an annual Company Tax Return (CT600)
Sole Traders/Partnerships:
- File Self Assessment tax returns by 31 January
- Pay Income Tax on profits over the personal allowance (£12,570)
- Also pay Class 2 and Class 4 National Insurance
Pro Tip: Don’t wait until January. Track profits and set aside tax money each quarter.
7. Making Use of Capital Allowances
If you invest in new tools, vans, or machines, you could claim capital allowances:
- Annual Investment Allowance (AIA): Claim 100% of eligible costs (up to £1 million)
- Writing Down Allowance (WDA): For costs above AIA limits
Smart Planning: Schedule big purchases before your financial year-end to maximise tax relief.
8. HMRC Investigations: Stay Audit-Ready
Construction is closely monitored by HMRC, largely due to subcontractor payments and cash dealings.
Make sure you:
- Keep detailed income and expense logs
- Submit accurate VAT and CIS returns
- Respond quickly to HMRC letters or queries
Tip: Do regular internal audits or work with an accountant to stay ahead of issues.
9. Year-Round Tax Planning
Planning all year beats panicking in January. Good habits help you avoid surprise bills and keep cash flow healthy.
- Track income and spending quarterly
- Don’t miss VAT or CIS deadlines
- Set up a separate account to hold estimated tax payments
Helpful Tip: Set monthly reminders to review finances and plan smarter.
10. When to Call in the Experts
Handling construction tax on your own? It can get messy fast.
Get professional help if:
- You work with both employees and subcontractors
- You’re unsure about VAT or CIS
- Your business is growing quickly
- You want to pay yourself tax-efficiently
Hiring a pro saves time, reduces stress, and helps you claim everything you’re entitled to.
In construction, precision matters. That applies to your tax planning too. Staying on top of your obligations throughout the year helps you avoid penalties and keep your finances in shape.
Whether you’re managing a team or working solo, it pays to build your tax knowledge. Want support with accounting, CIS, or VAT? Apex KPO offers tailored solutions to help UK construction firms stay compliant and financially fit.
Plan smart. File right. Build strong—tax success starts with you!
Do you have any questions?
Speak with the expert team at APEX