What’s the Difference Between CIS and PAYE?

In industry in general, there are two ways of engaging the services of an individual: one can be under a self-employed arrangement; the alternative is through PAYE. Now those two phrases are very commonly used but understanding the difference is quite important. 

The difference is that with PAYE, an employee is engaged under a contract of employment. And generally speaking, they are obliged to work for his or her employer.

PAYE Advantages and Disadvantages 

The advantages to the individual, historically, were that it guaranteed a set income and employment has a number of rights that protect the individuals from exploitation, not least the right not to be unfairly dismissed, and to minimum wage. Lately, that has also included the right to access a pension scheme of which the employer contributes some payments towards that. 

The thing is, that model has slightly been weakened by things like zero hour contracts where individuals are not necessarily guaranteed to know how much money they’re going to earn. So that’s a slight denouement of the traditional employee model. However, the general advantage to the individual is that generally speaking, they have protection of employment law, they know how much they are going to earn and have pension contributions made on their behalf. You would also be entitled to statutory sick pay or company sick pay, depending on what the employer has in place. 

The advantage to the employer of a PAYE workforce is that they know what resources they have available, and they have control over what and how their employees work. The disadvantage for the employer is that the cost of an employed workforce is generally around 45% more at least, in additional payments for employers like national insurance or pensions, holiday pay etc, etc. 

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Self-employment: the Alternative to PAYE 

Now if you consider the different model of self-employment – generally speaking, someone that supplies his services under a self-employed contract – they are considered to be in business of his own accord and therefore should be able to charge more and can expect to earn more. They have to pay their own tax but the employer who is paying them doesn’t have to pay any other contributions for them. They’re not obliged to do anything other than the contractual arrangements that they have with the individual. They’re not obliged to keep them on if work dries up either, so there’s no guarantee of ongoing work. A self-employed person doesn’t have any rights to holiday pay and doesn’t have pension contributions made on their behalf. 

But the upside for him is that because the employer isn’t having to pay holiday pay, and isn’t having to pay employer’s national insurance contributions or pension contributions from the money he has available to pay for the services needed, a greater proportion can be paid as earnings to the self-employed worker compared to an employee. 

The real cost of an employee versus a self-employed contractor

Here’s an example: if you’re paying someone £100 a day as an employee the cost to you, as an employer, is £145, you will have allocated £145 a day for that service. Now, if you engage a self-employed individual to do that work, you only have to pay him £100. As there are no other costs or pension or anything else, you could easily decide to pay him £120 for the day – you’d still be £25 better off, but the self-employed person is £20 better off compared to the PAYE option.

His take home pay will be considerably higher than the £100 earned by the PAYE employee. Out of what he’s been paid, they’ll be paying their tax, their National Insurance and their pension contributions. So they’re only likely to be taking home around £60 out of the £100 whereas as long as the individual is setting aside some of his money for his tax bill, then he will be receiving 100% percent of that payment. 

CIS or PAYE in the Construction Industry 

Now in the construction industry we have a long history of individuals being self-employed and we have our own specialist tax regime, called the CIS, which is exclusively for self-employed companies or individuals. CIS is solely a construction industry scheme that covers taxation in that industry. So self-employed parties are subject to CIS and generally speaking that will require the engager (the contractor) to deduct 20% of that £120 he’s paying the individual to retain that for his taxation. 

Even with the 20% deduction, the individual would still be better off in terms of take-home pay through CIS, and he’s also having his tax deducted for him at source, rather than having to keep a little away himself. So generally speaking that self-employed individual will later enjoy a tax rebate, assuming he looks after his accounts. But again, even on a fairly simplistic basis, most subcontractors generate a tax rebate as well, so they’re better off in their take home pay. It generally means they enjoy better take home pay, they have greater flexibility, but they don’t have the protection of employment rights.

Are CIS and PAYE different? 

CIS and PAYE are two fundamentally different routes for both providing labour, and obtaining labour. So, for an individual, if you choose to be PAYE, you accept that you are subject to the control and demands of your employer, and you accept that you will have limited rights in determining how much you’re going to be paid as your employer sets the pay rate. But you also recognise that you have protections in employment law. You’re entitled to the national minimum wage; you’re entitled to a pension scheme…. PAYE is generally considered to be the safe option, if you like. 

Someone who goes self-employed is looking to operate as a small business of their own accord and expects significantly greater remuneration because of the lack of protection that they have from being PAYE. They are a business of their own accord. They are working on a business-to-business relationship rather than the master servant relationship of employee and employer. They’re two fundamentally different types of arrangements.

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Nick Pilgrim

M.D. | CIS Payroll Expert
01245 493832

Nick loves nothing more than chewing the fat over CIS payroll queries – actually that’s not strictly true; he likes playing golf and driving round Europe, but pick up the phone to him anyway!

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