The two R&D schemes from April 2024
For accounting periods beginning on or after 1 April 2024, the old SME scheme and the old RDEC were replaced by two schemes that share the same rules on qualifying expenditure but calculate relief differently:
- The merged R&D expenditure credit (RDEC). A taxable credit of 20% of qualifying expenditure, available to any trading company carrying on qualifying R&D;
- Enhanced R&D intensive support (ERIS). For loss-making SMEs whose R&D spend is at least 30% of total expenditure. It gives an extra 86% deduction (186% in total) and a payable credit of 14.5% of the surrendered loss.
A company that qualifies for ERIS can choose the merged RDEC instead, but cannot claim both on the same costs.
What counts as qualifying expenditure
| Category | How much counts |
|---|---|
| Staff costs: salaries, employer NIC and pension contributions for staff directly engaged in R&D | 100% of the R&D share |
| Consumables, software, data licences and cloud computing | 100% of the R&D share |
| Externally provided workers (unconnected) | 65% |
| Subcontracted R&D (unconnected) | 65% |
Subcontracted work and externally provided workers must generally be in the UK (or, for workers, paid through UK PAYE) unless an exemption applies. Data and cloud costs only count for direct R&D, not for qualifying indirect activities.
How the merged RDEC turns into cash
The credit is treated as trading income, so it is taxed. HMRC then applies payment steps (CIRD112100) to the credit:
- Step 1. The credit pays off the company's corporation tax for the period;
- Step 2. Notional tax is withheld from what is left, at 25% if profits before the credit are chargeable at the main rate (including marginal relief companies) and 19% otherwise. The amount withheld is carried forward against future tax or surrendered to a group company;
- Step 3. The PAYE cap of £20,000 plus 300% of the company's PAYE and NIC liabilities limits what can be paid out. Any excess is carried forward as credit for the next period;
- Steps 4 to 7. The rest settles other tax periods and debts, can be surrendered within a group, and is then paid.
The upshot: where profits are at least £250,000 before the credit, each £1 of qualifying spend is worth 15p net of 25% tax; where they stay within £50,000 including the credit it is worth 16.2p net of 19% tax. Profits between £50,000 and £250,000 bear an effective marginal rate of 26.5% because of marginal relief, so a credit taxed in that band is worth 14.7p. For a loss-maker the cash received is 16.2p (before the PAYE cap), with the credit also reducing its trading loss.
How ERIS is calculated
The company first takes an extra deduction of 86% of qualifying expenditure, increasing its trading loss. It can then surrender the lower of 186% of qualifying expenditure and the unrelieved loss for a payable credit of 14.5%. The credit is not taxable. In HMRC's example at CIRD122000, a company with a £50,000 loss and £100,000 of qualifying costs takes an £86,000 deduction, surrenders a £136,000 loss and receives £19,720. If it also had £100,000 of property profits, the loss that could relieve them sideways is not unrelieved, so it could surrender only £36,000 for £5,220.
The intensity test compares relevant R&D expenditure with total expenditure in the accounts, including that of connected companies. A company that met the test and claimed in its last 12-month accounting period can still qualify for one period if it dips below 30%. Under ERIS a credit above the PAYE cap is an invalid claim, so the claim must be limited to the cap.
Worked example
A company spends £150,000 on R&D staff, £50,000 on an unconnected UK subcontractor, £10,000 on consumables, and £5,000 each on software and cloud computing. Its taxable profit after deducting these costs is £300,000.
| Step | Amount |
|---|---|
| Qualifying expenditure (subcontractor at 65%) | £202,500 |
| Gross RDEC at 20% | £40,500 |
| Corporation tax without the claim (£300,000 × 25%) | £75,000 |
| Corporation tax on £340,500 including the credit | £85,125 |
| Credit used against that tax | −£40,500 |
| Corporation tax payable | £44,625 |
The claim saves £30,375, which is 15% of the qualifying spend. These are the calculator's default inputs.
What this calculator does not cover
- Whether the work is R&D. A project must seek an advance in a field of science or technology, which a competent professional in that field would recognise;
- Connected parties. Connected subcontractors and EPWs follow different rules from the flat 65%;
- Overseas costs. The restrictions on overseas subcontractors and workers, and their exemptions;
- Carried-forward amounts. RDEC or notional tax brought forward, payments against other periods or debts, and group surrenders;
- Other cases. Grants and subsidised spend, pre-trading ERIS claims, Northern Ireland ERIS, ring fence trades, short accounting periods, and the SME definition itself.
Making the claim
Every claim must be preceded by an additional information form, and some companies must also tell HMRC in advance that they plan to claim. Budget 2026 (28 October 2026) announced that the claim notification form will be removed from 1 April 2027, through Finance Bill 2026-27, and the additional information form simplified from autumn 2027. Until the legislation is in force, the current rules apply. Our R&D tax credit team prepares claims, technical reports and the supporting computations. For companies whose patents earn income, see the Patent Box calculator and our corporation tax advisers.