Construction retentions ban and late payment reforms: what is coming

What has the government announced?

On 24 March 2026 the government published its response to the 2025 consultation on late payment, which ran from July to October 2025. It described the package as the biggest change to UK payment law in more than 25 years. The measures were confirmed in the King’s Speech on 13 May 2026 as part of the Small Business Protections (Late Payments) Bill.

For construction, the headline is an outright ban on cash retentions. The government considered the alternative of making retentions sit in protected third-party accounts, but chose a ban.

Important: these measures are not law yet. They need to pass through Parliament and the start date has not been confirmed. Until then, the existing rules still apply and retention clauses in your contracts remain valid.

Why retentions are being banned

A retention is usually 3% to 5% of each payment held back until the work is complete and the defects period ends. Smaller subcontractors often wait months or years for that money, and lose it entirely if the main contractor becomes insolvent. The government says late payment costs the UK economy around £11 billion a year.

Your rights today

The Housing Grants, Construction and Regeneration Act 1996, known as the Construction Act, already gives you the right to stage payments, payment and pay less notices, and adjudication. Under the Late Payment of Commercial Debts (Interest) Act 1998 you can usually claim interest at 8% above the Bank of England base rate, plus fixed compensation of £40, £70 or £100 depending on the size of the debt.

Retentions, tax and your accounts

Retentions also affect your figures. Money held back is normally still income when the work is done, so it counts towards profit even before you receive it. Retentions you never get back may qualify for bad debt relief. For VAT, the tax point for a retention is usually when it is paid or invoiced. Under the domestic reverse charge, your customer accounts for the VAT instead. CIS is deducted when the retention is actually paid, not when the work is done. We make sure retentions are tracked properly, so you do not pay tax early or lose relief.