Is CIS deducted from retentions?

Yes, but only when it is paid. As of October 2026, HMRC treats a retention like any other payment: CIS is deducted on the day it is released, at your CIS status on that date.

A retention is part of the contract price that a contractor holds back after the work is finished, to make sure you fix any defects. HMRC's CIS manual says there are no special rules for retention payments. This page follows that manual, the CIS 340 guide and section 61 of the Finance Act 2004, as checked on 17 October 2026.

Why CIS waits for the money

Section 61 says the contractor must make the deduction "on making a contract payment". HMRC's manual adds that the scheme only applies to payments actually made, and that if a payment due to you is withheld, the scheme does not apply to it. So nothing is deducted from the retention while the contractor holds it. When it is released, it is a payment, and CIS 340 says the contractor must then decide whether to verify you and make the deduction.

A worked example

Say you invoice £10,000 for labour only, and the contract lets the contractor hold back £500 until the defects period ends. You are registered for CIS, so the rate is 20%.

The total deducted is the same as if you had been paid £10,000 at once. Only the timing moves. Each deduction appears on the payment and deduction statement for the tax month you are paid, and the contractor must give you that statement within 14 days of the month's end. For the tax month of 6 May to 5 June, that is by 19 June.

Your status on the day it is paid

The manual says whether a retention is paid gross or under deduction depends on your payment status at the date of payment, not when the work was done. Retention periods can last years, so this matters:

The manual also notes that your business may have stopped by the time the retention is due. The guide to stopping trading covers what happens to deductions then.

Other money a contractor holds back

Retentions are not the only reason a payment comes in short. HMRC treats each differently:

• Set-off. Money withheld because the contractor believes you breached the contract, such as poor work, reduces the payment CIS is worked out on. HMRC's example: £400 of a £2,000 contract held back for below-standard work, with the deduction made on £1,600. If part of a retention is never released because of defects, CIS is not deducted from that part.
• Contra. A charge to you for goods or services, such as surplus materials, does not reduce the payment. HMRC's example: a £200 contract with £50 of materials charged, and the deduction still worked out on £200.
• Insurance, levy and admin charges. The manual says CIS applies to the payment actually made after deductions for public liability insurance, the CITB levy or administration charges.

A retention can also include money for materials you supplied. CIS is not deducted from the direct cost of materials, at release or at any other time.

What this means for you

Match each payment and deduction statement to the date the money arrived, not the date of the work. A retention released after 5 April goes on a statement for the new tax year, even if the work was done in the old one. If you get gross payment status before a retention is released, check it comes in full.

Steps to take when a retention is due

1. Note the retention amount and release date from each contract.
2. Before release, check your CIS status is current and your details match what HMRC holds, in case the contractor needs to verify you again.
3. Tell the contractor if any of the retention covers materials you paid for, and keep the receipts.
4. When paid, check the statement shows the right gross amount, deduction and tax month.
5. Keep that statement with the original invoice. You need it to claim the deduction against your tax.

The free MTD check shows when Making Tax Digital starts for you, and the trades section has more on CIS, including how a CIS deduction is worked out.