UK R&D Tax Credits for SMEs 2026/27: How to Claim and How Much You Get
UK R&D tax credits in 2026/27 -- the merged RDEC scheme gives a 20% above-the-line credit. Learn who qualifies, what costs count and how to make a claim.
What Are UK R&D Tax Credits?
Research and Development (R&D) tax credits are a UK government incentive designed to encourage companies to invest in innovation. They reduce your corporation tax bill -- or provide a cash payment if you are loss-making -- in proportion to how much you spend on qualifying R&D activities.
For many technology, engineering, pharmaceutical, software and manufacturing companies, R&D tax credits represent one of the most valuable reliefs available. Companies can claim significant amounts back -- sometimes enough to meaningfully fund continued development.
The Merged Scheme: What Changed from April 2024
Prior to April 2024, there were two separate R&D schemes:
- SME scheme -- enhanced deduction of 130% (later reduced to 86%) plus a payable credit for loss-makers
- RDEC (Research and Development Expenditure Credit) -- an above-the-line credit of 20% for large companies and certain SMEs
From 1 April 2024, HMRC merged these into a single scheme. For accounting periods beginning on or after 1 April 2024:
- The merged scheme applies to most companies (SMEs and large companies alike)
- The credit rate is 20% above-the-line
- Only "R&D Intensive SMEs" (those spending more than 30% of total expenditure on R&D) retain access to the enhanced SME scheme -- now called the ERIS scheme -- which provides a 27% credit rate
What Does "Above-the-Line" Mean?
Under the merged RDEC scheme, the 20% credit is recognised as a credit within the profit and loss account before tax -- hence "above the line." This means:
- The credit increases your accounting profit
- You then pay corporation tax on the higher profit
- The net benefit (after corporation tax at 25%) is approximately 15p for every £1 of qualifying R&D spend
Net Benefit Calculation
| Item | Amount |
|---|---|
| Qualifying R&D expenditure | £100,000 |
| RDEC credit (20%) | £20,000 |
| Corporation tax on credit (25%) | £5,000 |
| Net benefit to company | £15,000 |
For loss-making companies, the credit can be received as a cash repayment after deducting a notional corporation tax charge.
What Qualifies as R&D?
HMRC follows the definition set out in the Department for Science, Innovation and Technology (DSIT) guidelines. To qualify, a project must:
- Seek to achieve an advance in science or technology
- Involve overcoming scientific or technological uncertainty (i.e. the answer is not obvious to a competent professional in the field)
- Be attempted through systematic investigation -- trial, experiment or analysis
What This Includes
- Developing new software capabilities or algorithms that push the boundaries of current knowledge
- Creating new materials, products, processes or services
- Adapting existing processes in ways not readily deducible from current knowledge
- Conducting trials and experiments to test novel approaches
What This Excludes
- Routine software development with no novel technical challenge (building a standard website, for example)
- Applying known techniques in well-understood ways
- Market research, aesthetic design or social science
- Work done purely to meet regulatory requirements without technical advance
The boundary between qualifying and non-qualifying R&D is genuinely difficult in practice. Companies should document their projects carefully to show the technical uncertainty they were resolving.
Qualifying Expenditure Categories
Only specific types of cost qualify for R&D relief:
Staff Costs
The largest qualifying category for most companies. Includes:
- Gross salaries of employees directly engaged in R&D
- Employer's National Insurance contributions
- Pension contributions (up to a reasonable amount)
- Reimbursed expenses for R&D-related travel and subsistence
Important: You must apportion time. If an employee spends 60% of their time on R&D and 40% on other activities, only 60% of their costs qualify.
Subcontractors
From 1 April 2024, the merged scheme allows relief on payments to:
- Unconnected (third-party) subcontractors: capped at 65% of the payment
- Connected (group) subcontractors: at the lower of the payment or the subcontractor's actual qualifying costs
Payments to overseas subcontractors -- previously restricted from April 2023 -- are subject to specific rules. HMRC generally requires that overseas R&D can only qualify where the activity genuinely cannot be done in the UK (e.g. geographical or regulatory requirements, or exceptional skills not available domestically).
Consumables and Materials
Materials or consumables used directly in the R&D process that are:
- Used up in the R&D (not just capital items)
- Not resold or incorporated into a product for sale
Software and Cloud Computing
- Software licences used directly in R&D activity
- Cloud computing costs (introduced from April 2023) -- specifically the compute, storage and network costs attributable to R&D
Payments to Clinical Trial Volunteers
Where applicable in pharmaceutical/medical research, these are qualifying costs.
The PAYE/NI Cap
Since April 2021, the payable R&D credit for loss-making companies has been subject to a cap linked to PAYE and NI costs. The cap limits the cash repayment to:
Maximum payable credit = £20,000 + (3 x Company's total PAYE/NI costs)
This prevents companies with no UK employees (and therefore no UK PAYE liability) from claiming large cash repayments. Companies with significant UK payrolls rarely hit this cap.
R&D Intensive SMEs (ERIS Scheme)
Companies that qualify as "R&D intensive" SMEs retain access to a more generous rate:
- Must be an SME (fewer than 500 employees, under EUR100m turnover or EUR86m balance sheet)
- Must spend at least 30% of total company expenditure on qualifying R&D
- Mechanism: an 86% enhanced deduction (186% total deduction) that a loss-making company can surrender for a 14.5% payable credit
Surrendering the full enhanced deduction at 14.5% works out to a net cash benefit of approximately 27p per £1 of qualifying R&D spend (186% x 14.5% = 26.97%) -- considerably more generous than the standard ~15p under the merged scheme for ordinary loss-makers.
How to Make a Claim
R&D tax credits are claimed through the company's corporation tax return (form CT600), using the supplementary form CT600L.
Steps to Claim
- Identify qualifying projects -- list each R&D project and document the technical uncertainty being resolved
- Calculate qualifying expenditure -- break out staff time, subcontractor costs, consumables and software
- Prepare a technical narrative -- HMRC expects a description of the scientific/technological advance sought and the uncertainties encountered
- Submit with CT600 -- include the credit in the CT600L and subtract it from the corporation tax liability
- Keep supporting records -- timesheets, project records, invoices, payroll analysis
Advance Authorisation Requirement (New from April 2023)
Companies claiming R&D tax credits for the first time (or after a gap of three years) must submit a pre-notification to HMRC at least six months before the end of the accounting period for which they wish to claim. Missing this deadline means the claim is invalid.
Timeline for Receiving Your Credit
- Claims are processed as part of the corporation tax return
- HMRC typically processes straightforward claims within 28 days of the return being submitted
- For complex claims or those subject to HMRC review, processing can take several months
- HMRC may open an "R&D tax credit compliance check" -- essentially a targeted enquiry into the R&D claim
Common Mistakes to Avoid
- Claiming non-qualifying projects -- routine development with no technical uncertainty is not R&D under HMRC's definition
- Over-claiming staff time -- time must be documented; estimates are acceptable but must be reasonable and consistent
- Ignoring the advance notification rule -- new claimants must pre-notify HMRC
- Using an R&D specialist firm with contingency fees -- HMRC is increasingly scrutinising claims submitted by firms charging a percentage of the refund, as this creates an incentive to inflate claims
- Claiming overseas subcontractor costs without checking the rules -- restrictions may apply
Key Numbers for 2026/27
| Item | Rate/Amount |
|---|---|
| Merged RDEC credit rate | 20% |
| Net benefit after CT (25%) | ~15% |
| ERIS (intensive SME) net benefit | ~27% (86% enhanced deduction + 14.5% payable credit) |
| Subcontractor cap (unconnected) | 65% of payment |
| PAYE/NI cap formula | £20,000 + (3 x PAYE/NI costs) |
| Pre-notification deadline | 6 months before period end |
R&D tax credits remain one of the most powerful reliefs in the UK tax code for innovative companies. With the merged scheme now in place, the rules are more consistent across company sizes -- and the 20% credit rate can represent a significant contribution to innovation budgets.
Frequently asked questions
What R&D tax credit scheme applies to SMEs from April 2024?
From 1 April 2024, the old SME and RDEC schemes were merged into a single scheme. Most companies now claim under the merged RDEC scheme, which provides a 20% above-the-line credit on qualifying R&D expenditure.
What types of costs qualify for R&D tax credits?
Qualifying costs include staff salaries and NI (for time spent on R&D), subcontractor costs (capped at 65% of payments to unconnected parties), software licences, materials consumed in R&D, and certain cloud computing costs.
Can my company claim R&D tax credits even if it made a loss?
Yes. Under the merged scheme, loss-making companies can surrender the credit for a cash repayment from HMRC, subject to the PAYE/NI cap. This means even pre-profit startups can benefit from R&D relief.
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