How do R&D tax credits work for SMEs in 2026?

Full answer

The UK's Research and Development (R&D) tax relief system was substantially reformed from 1 April 2024, merging the old SME R&D scheme and the Research and Development Expenditure Credit (RDEC) into a single merged RDEC scheme. **Standard merged RDEC rate (from 1 April 2024)** - Credit rate: 20% of qualifying R&D expenditure - The credit is treated as taxable income, so at the main 25% CT rate the net benefit is 20% × (1 − 25%) = 15% of qualifying costs - Surrenderable for cash (at 20% minus tax) for loss-making companies, subject to the PAYE/NI cap **Enhanced R&D Intensive Support (ERIS) for SMEs** Loss-making SMEs where qualifying R&D expenditure is at least 30% of total expenditure qualify for enhanced support at 27% credit rate — giving a net cash repayment rate of approximately 20.25% of qualifying costs for a loss-making intensive SME (27% × 75% after 25% notional CT). **Qualifying costs** - Employee costs (salary, employer NI, pension contributions) for R&D staff - Subcontractor costs (at 65% for work contracted out) - Externally provided workers (65%) - Materials and utilities consumed in R&D - Software used in R&D activities - Clinical trial volunteer costs - Data and cloud computing costs (from April 2023) **PAYE cap** The maximum credit payable as cash is capped at 3× the company's total PAYE and NI liability for the year, to prevent abuse by companies with few UK employees. **Worked example** A tech SME spends £200,000 on qualifying R&D (employees + software). Credit at 20% = £40,000. CT bill of £50,000 is reduced to £10,000. Net saving: £40,000.

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