HR and payroll for construction in the United Kingdom
Reviewed by Mellow Editorial Team, HR & payroll content team
Construction businesses face a distinct set of HR and payroll obligations that differ significantly from most other sectors — combining standard PAYE rules with the Construction Industry Scheme, mixed workforces, and site-based logistics that make even routine compliance genuinely complicated.
The Construction Industry Scheme and how it sits alongside PAYE
The Construction Industry Scheme (CIS) is the most important structural difference between construction payroll and almost every other industry. Under CIS, contractors must verify subcontractors with HMRC and deduct tax at source from payments for labour — 20% for registered subcontractors, 30% for unregistered ones — before passing net amounts on. Gross payment status is available to subcontractors who meet certain compliance criteria.
CIS and PAYE are entirely separate obligations. A construction business will typically run both simultaneously: PAYE for directly employed workers, CIS deductions for self-employed subcontractors. The two systems must not be confused. Misclassifying an employee as a subcontractor to avoid employer National Insurance contributions (13.8% of earnings above the secondary threshold) is a well-known compliance risk in the sector, and HMRC targets construction businesses specifically because of it.
Subcontractors submit monthly CIS returns through the HMRC portal. Contractors must file even in months where no payments are made, or request an exemption in advance.
Workforce classification: employees, workers and subcontractors
Getting the employment status of each person on site right is arguably the most consequential HR decision a construction business makes. The categories matter for tax, National Insurance, holiday entitlement, sick pay and — following the Employment Rights Act 2025 — an expanding set of day-one rights.
An employed worker is entitled to 5.6 weeks of statutory annual leave (28 days including bank holidays for a five-day week), Statutory Sick Pay, and auto-enrolment pension contributions (employer minimum 3%, employee minimum 5% of qualifying earnings). They also have full employment protections from day one under the 2026/27 framework.
A genuine self-employed subcontractor has none of those entitlements from you — but "genuine" is the operative word. HMRC and Employment Tribunals look at the substance of the working arrangement: control, substitution rights, financial risk and integration into the business. A person who works exclusively for one contractor, uses the contractor's tools and takes instructions daily is unlikely to be genuinely self-employed regardless of what the contract says.
Labour-only subcontractors (often called LOSCs) fall into a particularly grey area. If they supply only their own labour rather than a service, the risk of deemed employment increases. Legal advice before engaging LOSCs repeatedly is money well spent.
Site-based payroll: practical complications
Construction payroll has logistical challenges that office-based businesses rarely encounter. Workers move between sites, projects start and end mid-pay-period, and teams may include a mix of directly employed operatives, agency workers and subcontractors working alongside each other.
Under Real Time Information, you must submit a Full Payment Submission (FPS) to HMRC on or before each payday for every employed worker. There is no grace period for late submissions on active employees. If your site foreman is recording timesheets on paper and emailing them in on a Friday afternoon, that lag creates real RTI risk.
Working Time and holiday pay calculations are more complex where hours vary. For workers without fixed hours, statutory holiday pay is now calculated using a 52-week reference period to establish the average weekly pay. Construction employers need systems that capture actual hours worked — not just contracted hours — to calculate this correctly.
The industry also relies heavily on agency workers. The Agency Workers Regulations give agency workers equal pay and conditions after 12 weeks in the same role. If you are the hirer, you need to track tenure and ensure the agency is paying correctly — the administrative burden sits partly with you.
Industry-specific agreements and collective pay arrangements
Many construction employers are covered by the Working Rule Agreement (WRA) negotiated by the Construction Industry Joint Council (CIJC), or by separate agreements covering engineering construction and other sub-sectors. These set minimum hourly rates above the National Minimum Wage, plus entitlements to travel allowances, subsistence payments, and industry sick pay that can differ from statutory minimums.
WRA payments such as travel and lodging allowances have their own tax treatment. Genuine reimbursement of qualifying expenses may be exempt from PAYE, but flat-rate payments that exceed approved amounts need to go through payroll or be covered by a PAYE Settlement Agreement or dispensation. Getting this wrong means unpaid tax and National Insurance, plus interest.
If your workforce is unionised or covered by a recognised agreement, check whether your rates and terms comply before each new project starts — not just at the point of hiring.
Year-end and ongoing reporting obligations
Construction businesses must meet the same core employer reporting deadlines as any other PAYE employer. P60s must be issued to all employees by 31 May following the end of the tax year. If employees have received benefits in kind — including any tool allowances structured as benefits — P11Ds must be filed with HMRC by 6 July.
CIS has its own monthly return cycle. Subcontractors should receive a deduction statement each month so they can reclaim CIS deductions against their own tax liability. Failing to issue these is a common oversight that creates disputes and HMRC penalties.
Keeping CIS records, PAYE records and project cost records aligned is worth investing in from the start. When projects span tax years, accurate records of who worked when — and under what status — are essential for any HMRC enquiry.
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