Answers · UK 2025/26
How do R&D tax credits work for SMEs in the UK?
From April 2023, SME R&D relief gives an enhanced deduction of 86% of qualifying costs (reduced from 130%). Loss-making SMEs can claim a payable credit of up to 10% (14.5% for R&D-intensive companies). Large companies use the RDEC scheme at 20%. The work must involve systematic investigation of scientific or technological uncertainty.
Full answer
Research and Development (R&D) tax relief reduces a company's tax bill, or in some cases generates a cash payment, when it carries out qualifying R&D work. From 1 April 2023 the SME scheme was significantly tightened. The enhanced deduction dropped from 130% to 86%, meaning for every £100 of qualifying R&D expenditure, an SME can deduct £186 in its tax computation instead of £100. For a profitable SME paying 25% corporation tax, this generates a saving of £21.50 per £100 spent (£86 x 25%). Loss-making SMEs that cannot use the deduction can surrender the loss and receive a payable credit. The standard payable credit rate for loss-making SMEs is 10% of qualifying costs, giving £10 cash per £100 spent. R&D-intensive SMEs, defined as those where qualifying R&D expenditure is at least 30% of total expenditure, can claim the higher payable credit rate of 14.5%, giving £14.50 per £100 of R&D costs. From April 2024, a merged RDEC scheme applies in most cases, with the main RDEC rate of 20% applying to both SMEs and large companies, with an R&D-intensive SME rate remaining at a higher level. The work must meet HMRC's definition of R&D: a systematic advance in science or technology, overcoming technological uncertainty that a competent professional could not readily resolve. This rules out routine development, copying existing solutions, or purely commercial innovation without a technical challenge. Qualifying costs include staff wages, employer NI, software, subcontractors (subject to caps), and consumables used in the R&D project. Cloud computing costs and data costs became claimable from April 2023. Claims are made via the CT600 and an R&D report. HMRC has significantly increased enquiries into R&D claims, so documentation of the qualifying work and costs is essential.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.