Tax Guide for the Construction Industry

Running a construction business means wearing a lot of hats and one of them, unfortunately, is tax.

From VAT to CIS, PAYE to Corporation Tax, there’s a lot to get your head around and even more to keep track of throughout the year.

The construction industry has its own set of tax rules and regulations, and getting them wrong (even accidentally) can lead to delays, fines or unexpected bills that knock your cash flow off track.

Whether you’re a sole trader laying bricks, a contractor managing a team of subcontractors, or a growing company juggling payroll and VAT returns, knowing what you owe and when is essential. That’s why we’ve created this updated Construction Tax Guide for 2025/26.

What’s in this guide:

• Tax Obligations Overview
• Important Deadlines
• Corporation Tax
• Sole Traders & Partnerships
• The Construction Industry Scheme (CIS)
• VAT for Construction Businesses]
• Construction Tax Deductions & Reliefs
• Capital Gains Tax (CGT)
• Avoiding Penalties & Staying Compliant
• FAQs

Tax Obligations for UK Construction Businesses

No matter the size of your business, if you’re working in construction, you’ve got tax responsibilities to handle. And unlike some other industries, construction has a few extra layers to deal with, especially if you’re using subcontractors or selling property.

Here’s a quick overview of the main taxes you’re likely to come across:

Corporation Tax – If you’re trading as a limited company, you’ll pay Corporation Tax on your profits. This includes any income after your allowable expenses have been deducted.

Income Tax – Sole traders and partners in a partnership don’t pay Corporation Tax, but they do pay Income Tax on their share of the business profits. How much you pay depends on how much you earn over the year.

Construction Industry Scheme (CIS) – If you work as a contractor and hire subcontractors, you’ll need to operate under the CIS rules. This means making deductions from subcontractor payments and reporting them to HMRC.

VAT – Most construction businesses need to register for VAT if their turnover exceeds the threshold. You’ll need to charge VAT correctly based on the work you’re doing — and not everything is at the standard 20% rate.

Payroll Taxes – If you employ staff, you’ll need to run PAYE and pay Employer’s National Insurance. You’ll also need to submit payroll reports every time you pay someone.

Stamp Duty Land Tax (SDLT) – If you’re buying property or land as part of your business, you’ll need to account for SDLT. The amount depends on the value and type of the property.

Council Tax – For owner-builders who live in or use part of the property during construction, you might be liable for Council Tax, even if the build isn’t complete.

Capital Gains Tax (CGT) – If you sell an asset, like a property or piece of land, at a profit, CGT may apply. Understanding your liabilities and what reliefs might be available is key to avoiding unexpected tax bills.

Important 2025/26 Tax Deadlines for Construction Businesses 

Missing important tax deadlines can lead to penalties, interest charges, or even HMRC investigations. Here are some key dates to keep in mind for the 2025/26 tax year:

• The new tax year starts on 6 April 2025 and ends on 5 April 2026.
  
• Self-assessment tax returns for 2024/25 must be filed online by 31 January 2026, and any tax due must be paid by the same date.
  
• If you’re self-employed, the second payment on account for 2024/25 is due by 31 July 2025, with a final payment, if required, due by the 31 January 2026.
  
• CIS returns need to be submitted monthly by the 19th of each month following the tax month and any deductions paid to HMRC by the 22nd if paying electronically.
  
• PAYE submissions (Full Payment Submissions) are due on or before each pay date, with payment to HMRC by the 22nd of the appropriate month.
  
• Corporation Tax is normally paid nine months and one day after the end of your accounting period.
  
• VAT returns are usually due one month and seven days after the end of your VAT period.

Corporation Tax for Construction Companies

What You Need to Know for 2025/26

If you’re running a limited company in the construction industry, Corporation Tax is something you’ll need to deal with each year. It’s paid on your company’s profits — that’s your income minus your allowable expenses.

For the 2025/26 tax year, Corporation Tax works on a sliding scale depending on how much profit your company makes:

• 19% on profits up to £50,000
  
• 25% on profits over £250,000
  
• If your profits fall between these two amounts, marginal relief may apply, giving you an effective overall rate between 19 and 25%.

But it’s not just your regular trading profits that are taxable, you’ll also need to consider chargeable gains. If your business sells a property, a vehicle, or any equipment for more than you paid for it, that gain is usually taxable too.

Some reliefs may apply, such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you’re selling up or closing down the company, though it’s important to get tailored advice to make sure you qualify.

Keeping accurate records of all income and outgoings is essential to get your tax calculation right and avoid overpaying or underpaying and facing penalties.

Filing Company Accounts

Every limited company must file statutory accounts with Companies House, as well as a Company Tax Return with HMRC. These aren’t just admin boxes to tick, they form the basis of your tax bill.

Your accounts will typically include:

• A Balance Sheet showing your business’s financial position at the end of the financial year: what you own, what you owe, and what’s left in the pot.
  
• A Profit and Loss Account, which outlines your income, expenses, and net profit for the year. This helps determine how much Corporation Tax you owe.
  
• A Directors’ Report, which is a brief statement about the company’s activities and performance (unless you’re classed as a micro-entity).

If you’re a micro-entity (a company with fewer than 10 employees, turnover under £1,000,000, and assets worth less than £500,000), your reporting is a little simpler. You may

be able to submit abridged accounts and skip the directors’ report altogether.

One area that trips up a lot of businesses is depreciation, the gradual loss of value in assets like tools, machinery, or vans. It’s not tax-deductible directly, but it still needs to be shown in your accounts. For tax purposes, you’ll use capital allowances instead (more on that below).

Super Deduction Tax & Capital Allowances

If you’ve read about the Super Deduction, you might be wondering whether it still applies. The short answer? Not anymore.

This temporary measure, which let companies claim 130% first-year relief on qualifying plant and machinery, ended in March 2023. That said, capital allowances still offer plenty of ways to reduce your tax bill.

For 2025/26, here’s what you can still claim:

• Annual Investment Allowance (AIA): You can deduct the full value of qualifying plant and machinery (up to £1 million) from your profits in the year you buy it. This covers most equipment and business vehicles.
  First-Year Allowances: Some assets, like electric vehicles and energy-efficient equipment, qualify for additional first-year reliefs.
• Full expensing: This is for companies only, and applies for new and unused assets
• acquired after 1 April 2023.
• Writing Down Allowances: If an item doesn’t qualify for AIA, or you’ve gone over the limit, you can claim a percentage of its value each year instead.

One area that’s often overlooked in construction is asset rental. If your business rents out equipment or plant, those items may not qualify for AIA in the same way, it depends on how they’re used and who’s using them.

The rules can be complex, so it’s always worth checking with your accountant to make sure your purchases are structured in a tax-efficient way.

By planning your investments carefully and timing large purchases near your year-end if it makes sense, you can make a big difference to your Corporation Tax bill.

Tax for Sole Traders and Partnerships in Construction

If you’re self-employed or in a business partnership, your tax responsibilities look a bit different compared to a limited company.

You don’t pay Corporation Tax, and you don’t need to file accounts with Companies House but you do still need to report your income and pay tax on your profits.

Let’s break it down.

Income Tax and National Insurance Explained

As a sole trader, you’re taxed as an individual, meaning your business profits are treated as your personal income. For the 2025/26 tax year, the income tax bands are:

• £0 – £12,570: Personal Allowance (tax-free) * this is reduced if your taxable income exceeds £100,000.
  
• £12,571 – £50,270: Basic rate (20%)
  
• £50,271 – £125,140: Higher rate (40%)
  
• £125,141+: Additional rate (45%)
  

You’ll also need to pay National Insurance on your profits:

• Class 2 NICs: A flat weekly rate (for 5 April 2025 year this was at £3.45/week), paid voluntarily if your profits are below a certain threshold (for 5 April 2025 year this was £6,725)
  
• Class 4 NICs: Based on your profits. 6% on profits between £12,570 and £50,270, and 2% on anything above that.
  

These NI contributions count toward your State Pension and other entitlements, so they’re important, but they can eat into your take-home pay, especially as your profits grow.

Construction Tax Return Tips for Sole Traders

Filing your tax return might not be the most glamorous part of running a business, but getting it right is essential to avoid overpaying (or getting caught out by HMRC later).

The key is to keep clear, consistent records of all income and expenses throughout the year. Construction businesses tend to have a mix of costs including materials, subcontractor payments, tool purchases, travel and many of these are deductible.

Some common allowable expenses in construction include:

• Tools and protective gear (hard hats, hi-vis, boots)
  
• Van costs (fuel, maintenance, insurance)
  
• Phone and business-related travel
  
• Accountancy fees
  
• Business premises or home office costs

Your profit is your total income minus your allowable expenses. This is the figure you report on your Self Assessment tax return, due by 31 January following the end of the tax year (which runs from 6 April to 5 April).

If you owe over £1,000 in tax, you may also need to make payments on account and advance payments toward the following year’s bill, due in January and July.

Making Tax Digital for Income Tax

From April 2026, sole traders and landlords earning over £50,000 will need to keep digital records and submit quarterly updates to HMRC under the new Making Tax Digital (MTD) rules.

This threshold drops to £30,000 in 2027 and £20,000 in 2028. MTD does not yet apply to trading partnerships or limited companies, but future rollout is expected. 

Read our full guide to the latest MTD for Income Tax Changes here.

Need a hand with it all? At Ryans, we help sole traders across the construction industry get their tax sorted accurately, efficiently, and without the stress.

The Construction Industry Scheme (CIS) Explained

If you’re a contractor paying subcontractors for construction work, or a subcontractor getting paid by a contractor, the Construction Industry Scheme (CIS) applies to you.

It’s HMRC’s way of making sure tax is collected properly from the construction supply chain and if you get it wrong, the penalties can be steep.

Let’s break down who needs to register and what the rules are for 2025/26.

Who Needs to Register for CIS

Contractors are any businesses or individuals that pay subcontractors for construction work. This could be a builder taking on extra hands for a big project, or a company hiring in trades on a freelance basis.

If that’s you, you must register for CIS with HMRC before you start paying anyone.

Subcontractors, on the other hand, are the ones being paid to carry out the work. They also need to register with HMRC under the scheme and whether they do or not affects how much tax gets deducted from their payments.

When a contractor hires a subcontractor, they must verify their status with HMRC. This determines how much tax to deduct from the subcontractor’s pay. If the subcontractor is registered and verified, the standard deduction applies. If not, the rate jumps to 30%.

There’s also something called Gross Payment Status. If a subcontractor meets certain criteria (like a clean tax record and a minimum turnover), they can apply to be paid in full, without any deductions made at source.

They’ll still need to declare and pay tax at the end of the year but they get to keep full control of their cash flow in the meantime.

CIS Tax Deductions and Rates for 2025/26

CIS tax deductions for 2025/26 are the same as in recent years:

• 20% if the subcontractor is registered and verified
  
• 30% if they’re not registered or haven’t been verified properly
  
• 0% if they have Gross Payment Status

These deductions apply only to labour costs– so excluding materials and VAT.

When calculating how much to deduct, you first need to separate out the cost of any materials they’ve invoiced for. You then apply the CIS rate to the labour portion of the payment. The subcontractors invoice should clearly reflect a split between labour and materials.

Once you’ve made the deduction, you’re responsible for reporting and paying it to HMRC not the subcontractor. That means:

• Submitting a monthly CIS return by the 19th of each month (or the 22nd if you’re paying electronically)
  
• Giving your subcontractors a payment and deduction statement showing how much was taken

Even if you haven’t made any CIS payments in a month, you still need to submit a nil return to avoid late penalties.

CIS can be fiddly but at Ryans, we manage the full process for numerous construction clients. From verification to filing returns, we’ll make sure you’re on the right side of the rules (and never paying more than you need to).

VAT for Construction Businesses

VAT can be a bit of a minefield in the construction industry. With multiple rates, complicated rules around new builds and renovations, and ever-changing HMRC requirements, it’s easy to feel like you’re constantly playing catch-up.

Here’s what construction businesses need to know about VAT in 2025/26.

When and How to Register for VAT

If your taxable turnover exceeds £90,000 over the last 12 months (updated threshold for 2025/26), you must register for VAT.

This applies whether you’re a sole trader, partnership or limited company — and it’s based on your total VAT-able sales, not your profit.

You can also register voluntarily if your turnover is below the threshold. This might make sense if:

• Most of your customers are VAT-registered businesses who can reclaim VAT
  
• You want to reclaim VAT on your own business expenses
  
• You’re looking to give your business a more professional image
  

Once you’re VAT-registered, you’ll need to charge VAT on your invoices, submit VAT returns (usually quarterly), and keep digital records.

VAT Rates for Construction Work

When dealing with the end user, and outside the scope of CIS, the VAT rate you charge depends on the type of work you’re doing:

• Standard rate (20%) applies to most building work, including repairs, maintenance and improvements.

• Reduced rate (5%) applies to specific services, such as installing energy-saving materials or converting a building into a different residential use.

• Zero-rated (0%) applies to work on new residential buildings, like building a new house or flat from scratch.

There are also special rules for certain cases – if you’re:

• Doing qualifying work for a disabled person, some services may be zero-rated.

• Working on property in the Isle of Man, the same UK VAT rules apply but always double-check local guidance.

• Supplying both materials and labour, you’ll need to understand how the VAT rules apply to each element.

The rules can be fiddly, especially when you’re mixing standard and zero-rated work, so it’s always worth checking before quoting or invoicing. Misapplying the wrong rate can lead to HMRC queries, penalties or worse.

VAT Returns and Making Tax Digital (MTD)

If you’re VAT-registered, you’ll need to submit VAT returns every quarter using HMRC-approved digital software.

This is part of the government’s Making Tax Digital (MTD) initiative, which now applies to all VAT-registered businesses, even those under the threshold who registered voluntarily.

That means:

• Keeping digital records of all VAT invoices and receipts
  
• Using compatible software (like QuickBooks, Xero or Sage) to file your return
  
• Submitting your VAT return within one month and 7 days of the end of your VAT period

Some smaller construction businesses might benefit from the Flat Rate VAT Scheme. Under this scheme, you charge customers the standard VAT rate, but pay HMRC a fixed percentage of your gross turnover (14.5% for most construction businesses).

You can’t reclaim VAT on most purchases, but the simplified admin often makes it worthwhile.

Not sure whether the flat rate scheme or standard VAT accounting is better for your setup? At Ryans, we’ll help you make the right call and handle your VAT returns properly, so you never miss a deadline or overpay.

Construction-Specific Tax Deductions & Reliefs

In construction, your tools, gear, and day-to-day running costs aren’t just essential to the job, they can also be used to reduce your tax bill. But HMRC has rules about what counts as an allowable expense and how much you can claim. Here’s what you need to know.

Claiming Tools, Equipment & Vehicle Costs

If you’re buying tools, machinery, or vehicles for your business, you may be able to claim capital allowances to reduce your tax bill.

That means instead of writing off the full cost of, say, a new cement mixer in one go, you can claim part of the cost over time through your tax return.

That said, smaller businesses often benefit from the Annual Investment Allowance (AIA), which lets you claim up to £1 million of qualifying assets in full in the year you bought them.

So what counts as “plant and machinery”? For most construction businesses, this includes things like:

• Power tools and heavy-duty equipment
  
• Work vans and vehicles
  
• Specialist kit like scaffolding or mini diggers

When it comes to vehicles, you’ve got two options. You can either claim mileage (using HMRC’s approved rates) or the actual running costs (fuel, insurance, servicing, etc.).

You can’t claim both so it’s worth running the numbers to see which gives you the bigger deduction.

Just remember: if you’re using your vehicle or tools for both business and personal use, you can only claim the business proportion.

Claiming Tax Relief on Safety Gear

Hard hats, high-vis jackets, steel toe boots, whatever keeps you and your team safe on-site could also help you reduce your tax bill.

HMRC lets you claim tax relief on protective clothing that’s wholly and exclusively for work. That means things like:

• Personal protective equipment (PPE)
  
• Safety gloves, goggles, and masks
  
• Branded workwear (if it’s a uniform)
  

But if you’re buying regular clothes, even if you wear them for work, they won’t count. For example, a plain hoodie or jeans don’t qualify unless they’re PPE or clearly branded as a uniform.

To stay on the safe side, make sure you keep clear records of all your safety gear purchases. Ideally, that includes receipts, a breakdown of costs, and notes on who they were issued to (especially if you’re running a team).

Tax-Deductible Construction Business Expenses

Beyond tools and safety gear, there are plenty of everyday running costs that can be deducted from your taxable profits.

These might include:

• Materials and supplies used in jobs
  
• Rent on business premises or storage units
  
• Insurance – including public liability, employer’s liability, and tool insurance
  
• Advertising and marketing (even your website)
  
• Subcontractor costs, if not already covered under CIS
  
• Training, memberships, or trade subscriptions
  

One area that often gets overlooked is overpaid tax under the Construction Industry Scheme (CIS). If you’re a subcontractor and you’ve had deductions taken from your payments, you might be due a rebate, especially if your expenses are high

 Keeping on top of your records and submitting a proper tax return can make a big difference here.

Just like with vehicles and tools, it’s important to separate business from personal use. If something’s used for both, you’ll need to work out the split and only claim for the business bit.

Property, Asset Sales & Capital Gains Tax (CGT)

Selling off part of your business whether it’s a piece of machinery, a van, or a property you’ve developed can trigger Capital Gains Tax (CGT). But the good news is, with the right planning and reliefs in place, you could reduce what you owe or even avoid it altogether.

When CGT Applies to Construction Businesses

CGT kicks in when you sell (or sometimes give away) a business asset and make a profit known as a ‘gain’. In the construction world, this might include:

• Selling a business premises or plot of land
• Disposing of high-value plant, machinery or tools when sold for more than they were purchased for
• Selling shares in your company (if you’re incorporated)

The profit you make after deducting what you paid for the asset and any allowable costs (like legal fees or improvements) is what gets taxed.

For the 2025/26 tax year, the CGT rates for individuals are:

• 18% for basic rate taxpayers
• 24% for higher and additional rate taxpayers

You also get an Annual Exempt Amount, which is a tax-free allowance before CGT applies. For 2025/26, this is £3,000, down from previous years.

If you’re a limited company, CGT doesn’t apply. Instead, your profit from asset sales is taxed as part of your overall Corporation Tax.

BADR and Construction Businesses

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, is one of the most valuable tax reliefs available when you sell all or part of your business.

If you qualify, BADR lets you pay just 14% (increasing to 18% from April 2026) CGT on qualifying gains, instead of the standard rates above. It applies to:

• Sole traders selling all or part of their business
• Business partners exiting a partnership
• Shareholders selling shares in a trading company

To qualify, there are a few key rules:

• You must have owned the business (or shares) for at least two years before disposal
• If you’re selling shares, the company must be a trading business, and you need to own at least 5% of the shares and voting rights
  The asset must be disposed of while the business is still trading — or within three years of cessation

There’s also a £1 million lifetime limit on gains that can qualify for BADR. Once you hit that threshold, any additional gains will be taxed at the normal CGT rates.

Used properly, BADR can result in significant tax savings when you sell your construction business, exit a partnership, or dispose of valuable assets. But it’s a complex area and the rules have changed over the years, so it’s worth getting advice before you make any big decisions.

At Ryans, we help construction clients plan ahead for sales or disposals, making sure you structure them in a way that takes full advantage of the reliefs available.

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Avoiding Penalties and Staying Compliant

In construction, it’s easy to fall behind on admin when you’re juggling tight deadlines, supply issues, and a never-ending stream of invoices.

But when it comes to tax, even a small oversight can land you with a fine or trigger a costly HMRC enquiry.

Knowing where construction businesses typically slip up is half the battle. The other half? Putting systems in place to stay ahead of it all.

Common Construction Tax Mistakes

Some of the most common tax issues we see in the construction industry aren’t down to dodging the rules, but rather not knowing them or not having the right processes in place.

Late filings and payments are one of the biggest culprits. Whether it’s your monthly CIS return, PAYE submission, or VAT returns, missing a deadline can result in penalties and interest. And those can stack up fast.

Misclassifying workers is another major one. Treating a subcontractor as self-employed when they should be on payroll (or vice versa) can cause serious problems with HMRC. It’s vital to get your employment status checks right, especially in a sector where short-term contracts are common.

And then there’s the paperwork. Or lack of it. Not keeping accurate digital records, especially now that Making Tax Digital (MTD) is in force for VAT, can put you at risk of non-compliance. Construction businesses often handle huge volumes of receipts, expenses, and invoices and without a proper system, things can easily get lost in the mix.

How Ryans Can Help

At Ryans, we work with construction firms every day — from sole traders and subcontractors to contractors and growing limited companies.

We can help you get ahead of your tax responsibilities with:

• Tax planning and business structure advice to ensure you’re set up in the most tax-efficient way
  
• CIS and payroll support, including processing payments, submitting returns, and advising on worker status
  
• Making Tax Digital-ready software setup to make VAT submissions and recordkeeping hassle-free
  
• Capital allowance and asset planning, so you get the most tax relief on tools, machinery and vehicles
  

Whether you need hands-on help with your monthly accounts or big-picture tax planning for your future, we’ll speak your language and make sure nothing slips through the cracks.

Construction Tax FAQs

Do construction companies pay VAT?

Yes, most construction companies in the UK are required to register for VAT once their taxable turnover goes over £90,000 (2025/26 threshold). Even if your turnover is below this, voluntary registration can still be beneficial depending on your costs and clients.

VAT applies to most building work, but the rate depends on the type of project standard, reduced, or zero-rated.

What taxes does a building contractor pay?

A building contractor may need to pay several taxes, including Corporation Tax (if operating as a limited company), Income Tax and National Insurance (if self-employed), CIS deductions, VAT, and PAYE and Employers’ National Insurance (if they employ staff).

The exact tax obligations will depend on the business structure and size.

Can I claim tools and safety gear as expenses?

Yes. Tools, equipment, and safety gear that are used solely for work can typically be claimed as allowable business expenses. You may be able to claim capital allowances on bigger purchases like machinery or vans.

PPE and protective clothing are also usually tax-deductible, as long as they’re necessary for the job and not general clothing.

How does the Construction Industry Scheme work?

Under the CIS, contractors must deduct money from payments to subcontractors and pass it to HMRC as advance payment towards their tax and National Insurance.

Subcontractors must register with HMRC, and contractors must verify them and submit monthly CIS returns showing who they’ve paid and what they’ve deducted.

What is the CIS tax rate in 2025?

In 2025/26, the standard CIS deduction rate is 20% for registered subcontractors. If a subcontractor isn’t registered with HMRC, the deduction rises to 30%.

Some subcontractors may qualify for gross payment status, meaning they receive full payment without deductions and handle their own tax directly.

Can I claim Super Deduction in 2025/26?

The Super Deduction ended in March 2023, so it’s no longer available for new purchases. However, construction businesses can still benefit from other capital allowances, such as the Annual Investment Allowance (AIA) and First-Year Allowances for qualifying plant and machinery.

How do I pay Corporation Tax as a construction company?

If you run a limited company, you’ll pay Corporation Tax on your profits. This involves filing a Company Tax Return after preparing your year-end accounts, then paying the tax due, usually nine months and one day after your accounting period ends. Payments must be made online via HMRC, using your company’s Corporation Tax reference.

What’s the VAT rate for new build houses?

Construction work on new build homes is usually zero-rated for VAT, meaning you don’t charge VAT to the customer, but you can still reclaim VAT on qualifying costs. This only applies if the building meets HMRC’s criteria for a new residential dwelling. Not all projects qualify.

What’s the deadline for CIS returns?

CIS returns must be submitted by the 19th of each month following the month you made payments to subcontractors. So if you paid someone in April, your CIS return for that period is due by 19th May. Late submissions can result in penalties, even if you’ve only made one payment.