UK R&D Tax Relief for SMEs: PAYE Cap and Submission Rules 2026

Research and Development (R&D) tax relief has undergone its most significant structural changes in decades. From April 2024, the previous dual system of SME R&D Enhanced Deduction and the Research and Development Expenditure Credit (RDEC) has been replaced by a single "merged scheme." Understanding how the new rules work -- including the PAYE cap on payable credits and the mandatory Additional Information Form -- is essential for any UK company making a claim.

This guide explains the 2026 position for SMEs: how the merged scheme operates, what costs qualify, how the PAYE cap limits payable credits, and the pre-submission requirements that caught many businesses out when they were introduced.

The Merged R&D Scheme From April 2024

Prior to April 2024, UK companies could claim R&D relief under one of two schemes depending on their size:

SME Scheme: Small and medium-sized enterprises (generally fewer than 500 employees and below thresholds for turnover and balance sheet) could claim an enhanced deduction of 230% of qualifying R&D costs against profits, or a payable credit of 14.5% of the surrenderable loss for loss-making SMEs. This was very generous -- a loss-making SME spending £100,000 on R&D could receive a cash payment of £33,350.

RDEC (Research and Development Expenditure Credit): Available to large companies and SMEs claiming on costs that did not qualify for the SME scheme (for example, subsidised costs or work carried out for a third party). The RDEC rate was increased to 20% from April 2023 before being carried into the merged scheme.

From accounting periods beginning on or after 1 April 2024, these two schemes have merged into a single scheme for most companies. The merged scheme applies the RDEC-style above-the-line credit of 20%. This means the credit appears as a taxable receipt in the company's accounts (above the line on the P&L), reducing the net effective rate -- after 25% corporation tax the net benefit is approximately 15% of qualifying expenditure.

Who Qualifies for the Merged Scheme?

The merged scheme is available to any company paying corporation tax in the UK that carries out qualifying R&D activities. There is no size restriction for eligibility under the merged scheme, though the R&D intensive SME scheme (see below) does have specific conditions.

The fundamental requirement is that the company must be resolving genuine scientific or technological uncertainty. This does not mean the company needs to be a laboratory or a tech startup. Manufacturing companies, engineering firms, food producers, software companies, and many others regularly carry out qualifying R&D. However, routine work -- copying a competitor's product, incremental improvements with no genuine uncertainty, or standard software development using existing techniques -- does not qualify.

The R&D Intensive SME Scheme

A small subset of loss-making SMEs that spend a high proportion of their costs on R&D may qualify for the higher-rate "R&D intensive SME" scheme. This applies where R&D expenditure equals at least 30% of total expenditure. For these companies, the payable credit rate is 27% rather than 20%, providing significantly more support per pound of qualifying R&D investment.

This scheme is a carve-out from the merged scheme designed to maintain support for early-stage, pre-revenue businesses that are genuinely research-heavy. Companies that meet the threshold should consider whether they qualify for this enhanced rate before defaulting to the standard merged scheme.

What Costs Qualify?

Qualifying expenditure under the merged scheme includes:

Staffing costs. Salaries, employer NI contributions, and employer pension contributions of employees directly and actively engaged in R&D. This includes employees supervising R&D, as well as those doing it. Administrative or managerial staff who are not involved in the R&D itself are excluded. You can apportion costs where an employee spends only part of their time on R&D.

Subcontractors. The merged scheme restricts the relief available on subcontractor costs significantly compared to the old SME scheme. Under the merged scheme, 65% of payments to unconnected subcontractors for R&D activities are qualifying (rather than the full cost). For connected subcontractors, the qualifying cost is the lower of the payment made and the subcontractor's own qualifying costs. Subcontractors must be UK-based for the costs to qualify, with very limited exceptions for overseas work that cannot be done in the UK.

Externally provided workers (EPWs). Staff provided through staffing agencies count as EPWs. 65% of the payment to the agency is qualifying, provided the workers are directly and actively engaged in R&D.

Software and cloud computing. Software licenses used directly in R&D qualify. Cloud computing costs are now explicitly qualifying -- specifically the proportion of compute, storage, and related costs used for R&D activities.

Consumables and materials. Materials used in R&D qualify, including materials consumed or transformed during the R&D process. Power, water, and fuel used in R&D also qualify.

Clinical trials payments to volunteers. Payments to subjects in clinical trials qualify, which is relevant for pharmaceutical and medical device companies.

Costs that do not qualify include: capital expenditure (though plant used for R&D may qualify for capital allowances separately), production and distribution costs, the cost of land, and costs of creating intellectual property through means other than R&D.

The PAYE Cap on Payable Credits

One of the most important rules for loss-making companies is the PAYE cap. The merged scheme, like RDEC before it, allows loss-making companies to surrender their R&D credit for a cash payment from HMRC. However, this payable credit is capped at 3 times the company's PAYE and National Insurance liability for the period.

How the cap works:

Suppose a company has qualifying R&D expenditure of £200,000. At a 20% credit rate, the gross R&D credit is £40,000. After corporation tax at 25%, the net credit is £30,000. If the company is in a loss position and wishes to surrender this credit for cash, it can receive up to £30,000 -- but only if 3x its PAYE/NI liability for the year equals or exceeds £30,000.

If the company's PAYE and employer NI bill for the year was only £8,000, the cap would be £24,000 (3 x £8,000). The company could only receive £24,000 as a payable credit, not the full £30,000.

The PAYE cap was introduced to prevent abuse by companies with artificially low UK payroll costs -- for example, companies using overseas staff or contractors to do the R&D while claiming UK tax credits. Companies with a small UK payroll relative to their R&D claim should be aware that the cap may significantly reduce their benefit.

The cap does not affect profitable companies -- it only bites when a company wants to convert a credit into a cash payment rather than setting it against a corporation tax liability.

The Additional Information Form (AIF)

From 8 August 2023, all R&D claims -- regardless of which scheme -- require prior submission of an Additional Information Form (AIF) before the Corporation Tax return is filed. This is a separate online form submitted through HMRC's portal.

The AIF requires:

Company details. Name, UTR, accounting period dates, contact details for the person responsible for the claim.

Agent details. If an agent is preparing the claim, their details must be included.

Project descriptions. The company must describe each R&D project being claimed. For companies with fewer than 3 projects, each must be described individually. For companies with 4 or more projects, they can describe the 3 largest projects by cost plus a summary of the rest.

Qualifying costs. A breakdown of qualifying expenditure by category: staffing costs, EPWs, subcontractors, consumables, software, cloud computing, and clinical trial payments. The amounts in each category should match what is claimed on the CT600.

Qualifying activities. A description of the scientific or technological advancement being sought, the uncertainty that existed, and how the company worked to resolve it.

Contact information. HMRC want to know who in the company has knowledge of the R&D activities, not just the finance director.

The AIF should be submitted as early as possible -- ideally several weeks before the CT600 filing date. HMRC will not acknowledge or approve the AIF; you simply receive a reference number confirming submission. That reference number should be included on the CT600.

How to Calculate Your Merged Scheme Credit

The calculation for the merged scheme is simpler than the old dual-rate system:

1. Identify qualifying R&D expenditure for the accounting period
2. Calculate the gross R&D credit at 20% (or 27% for qualifying R&D intensive SMEs)
3. The gross credit is taxable income -- add it back to profits for corporation tax purposes
4. Net credit = gross credit minus the corporation tax on the gross credit
5. If the company has a corporation tax liability, the net credit reduces that liability
6. If the net credit exceeds the corporation tax liability (or the company is loss-making), the excess can be carried back, carried forward, or surrendered for a cash payment (subject to the PAYE cap)

For a profitable company paying 25% corporation tax with £100,000 of qualifying R&D costs:

• Gross credit: £20,000
• Corporation tax on £20,000 at 25%: £5,000
• Net benefit: £15,000

Frequently Asked Questions

Does the merged scheme apply to all accounting periods from April 2024? Yes, the merged scheme applies to accounting periods beginning on or after 1 April 2024. Companies with accounting periods straddling this date may need to apportion costs and apply different rules to each part.

We are an SME -- do we lose out under the merged scheme vs the old SME scheme? For profitable SMEs, the merged scheme at 20% credit (approximately 15% net after corporation tax) is less generous than the old SME enhanced deduction of 230% (which could deliver approximately 24.7% net benefit at 25% tax). However, loss-making non-intensive SMEs also receive less -- previously 14.5% cash credit, now 15% net (but subject to PAYE cap). Only R&D intensive SMEs (more than 30% R&D intensity) can access the 27% rate.

What is "technological uncertainty"? Technological uncertainty means that the solution to a problem is not known and could not easily be worked out by a competent professional in the field. If any competent engineer or scientist could solve the problem using existing knowledge without experimentation, it is probably not qualifying R&D.

Can we claim R&D tax relief on software development? Yes, but only on the portions involving genuine technological uncertainty. Routine software development -- building standard websites, implementing known algorithms, or integrating existing systems -- does not qualify. Creating new programming languages, developing novel compression algorithms, or building software to overcome specific technical challenges may qualify.

How far back can we claim R&D tax relief? Claims must be made within 2 years of the end of the accounting period. If you missed a claim for an earlier year within that window, an amended return can be submitted. Claims older than 2 years are generally out of time.

Do we need specialist R&D tax advisers? Not legally required, but given the complexity of the merged scheme, PAYE cap calculations, and AIF requirements, many companies find specialist advisers pay for themselves through accurate claims and avoiding errors.

What records should we keep for R&D claims? Keep records of time spent on R&D projects by employees (timesheets), project documentation describing the uncertainties and approach, costs attributed to R&D, and any evidence of technological or scientific advancement. HMRC enquiries into R&D claims are common and can go back several years.

Can charities claim R&D tax relief? No. R&D tax relief is only available to companies paying corporation tax. Charities are generally exempt from corporation tax and cannot claim.

What happens if HMRC enquires into our R&D claim? HMRC can open an enquiry within 12 months of the CT600 filing (or longer if the return was late or there is fraud). During an enquiry, they will ask for detailed project descriptions, cost evidence, and may interview technical staff. Having good records and a well-documented claim significantly reduces risk.

Is overseas R&D eligible under the merged scheme? Overseas subcontractor and EPW costs are restricted -- they only qualify if the work could not reasonably be done in the UK (for example, access to a unique facility or specialist expertise that does not exist in the UK). This is a tighter restriction than under the old SME scheme and requires careful analysis.