Paying a subcontractor in cash is not against the law. What matters is what you do around that payment. Verify them with HMRC, deduct the right amount, and report it on time. Get those three things right and the cash itself is a non-issue. Skip them, and the payment method is the least of your problems.
This isn’t about paying your own staff or about a homeowner handing a builder banknotes on a Friday. It’s for the tradesperson who takes on another tradesperson: a subcontracted plumber, a labourer for a big job, someone brought in under the Construction Industry Scheme, or CIS. The rules here are different from paying an employee.
Is is legal to pay a subcontractor in cash?
Yes. Nothing in HMRC’s CIS guidance says a subcontractor must be paid by bank transfer, cheque, or anything else [1]. Cash is a legal way to pay for construction work, just as it’s legal for most other transactions.
The legal risk sits elsewhere:
- Whether you verified the subcontractor first
- If you deducted the right amount
- Whether you gave them the right paperwork and told HMRC about it
Those duties apply whatever the payment method. Pay by bank transfer and skip verification, and you’re just as non-compliant as if you’d paid cash.
CIS subcontractors are not the same as employees
Put aside anything you’ve read about paying staff cash in hand. Those rules cover PAYE tax codes, payslips, and National Insurance worked out by an employer. A CIS subcontractor sits under a different system. Under CIS, you deduct money from a subcontractor’s payment and pass it to HMRC [1]. It counts as an advance towards their own tax and National Insurance. The subcontractor is self-employed – they invoice you for work; they don’t draw a wage. Getting that status right matters.
What do you need to do before the first payment?
Before you pay a new subcontractor for the first time, you must verify them with HMRC [2]. That means giving HMRC their Unique Taxpayer Reference and other registration details. These must match exactly what the subcontractor used to register for CIS, whether they’re a sole trader, a partnership, or a limited company.
HMRC then tells you two things: whether they’re registered for CIS, and what rate of deduction to apply [2]. You’ll need to verify them again if you haven’t put them on a CIS return in the current tax year or the previous two, even if you’ve worked with them before.
How much do you actually deduct, and from what?
There are three rates:
- Registered subcontractors are deducted at 20%.
- Unregistered ones are deducted at 30%
- Subcontractors with gross payment status get paid in full, with nothing withheld [3]
The percentage doesn’t apply to the whole invoice, though. HMRC lets you strip out VAT and costs first, things like materials, plant hire, and fuel. Only then do you apply the rate [3]. That way the deduction lands on the labour, not the full bill. A subcontractor who’s supplied and paid for their own materials shouldn’t have those costs taxed like wages.
What happens after you pay them?
Two separate duties follow every payment where you’ve made a deduction. First, give the subcontractor a payment and deduction statement within 14 days of the end of the tax month [3]. It’s their record of what they’ve earned and what’s already gone to HMRC. They’ll need it for their own tax return.
Second, file a CIS return with HMRC by the 19th of the following month [4]. Declare what you’ve paid and confirm the people on it aren’t employees. Even in a month with no payments, a nil return is still due.
Miss that deadline and the penalties stack up fast. It’s £100 for a day late, then another £200 once you hit two months [4]. At six and twelve months, it’s the higher of £300 or 5% of the deductions on the return. Beyond a year, it can reach £3,000 or the full deduction amount, whichever is more. Get a subcontractor’s employment status wrong on the return, and there’s a separate penalty of up to £3,000 on top of any tax due [4].
Where does insurance fit in when you take on a subcontractor?
Bringing in a subcontractor changes more than your tax paperwork – it can change what your insurance covers, too. Take a self-employed subcontractor, one who sets their own hours and uses their own tools. They aren’t automatically covered under your employers’ liability insurance. It’s worth checking they carry their own cover before the job starts.
Someone you supervise closely, on your site and with your tools, is a different matter for that cover. It’s one more reason to settle the status question at the start, not after something’s gone wrong on site.
So where’s the real risk?
HMRC has been sharpening its focus on the construction supply chain. From April 2026, tougher measures put more weight on ongoing checks, not just a one-off check at the start [5]. A business that knew, or should have known, it was dealing with fraud further down the chain can be held liable for the tax lost.
None of that comes from paying in cash. It comes from treating verification, deduction, and reporting as optional, or from assuming a subcontractor’s status without checking it. Handled properly, cash is just cash, but handled carelessly any payment method leaves the same gap in your records.
Get the system right, then get on with the job
Tradesman Saver has arranged cover for tradespeople since 1984, direct rather than through comparison sites. Policies are underwritten by Standard & Poor’s A-rated insurers and built to cover more than one risk at once.
Taking on subcontractors is a normal part of growing a trade business. If you want to check your own cover reflects how you actually work with subcontractors, you can get a quote today in a few minutes.
Sources
- GOV.UK, “Construction Industry Scheme (CIS)”
- GOV.UK, “What you must do as a CIS contractor: verify subcontractors”
- GOV.UK, “What you must do as a CIS contractor: make deductions and pay subcontractors”
- GOV.UK, “What you must do as a CIS contractor: file your monthly returns”
- GOV.UK, “Tackling Construction Industry Scheme fraud”
Disclaimer: This information is provided for general guidance only and does not constitute tax advice. You should seek advice from a qualified tax professional regarding your specific circumstances before making any decisions.
