For accounting periods beginning on or after 1 April 2024, most companies claim under the merged R&D expenditure credit scheme. It replaced the two earlier reliefs, the SME scheme and RDEC, with a single above-the-line credit modelled on RDEC: 20% of qualifying expenditure, brought into account as taxable income and then applied against the company's Corporation Tax, with any balance payable in cash subject to a cap. Loss-making SMEs that are R&D intensive can claim enhanced R&D intensive support (ERIS) instead.
What it is
| Feature | Merged scheme rule |
|---|---|
| Applies to | Accounting periods beginning on or after 1 April 2024 |
| Who | Companies of any size within the charge to Corporation Tax carrying out qualifying R&D |
| Benefit type | Taxable expenditure credit |
| Rate | 20% of qualifying expenditure |
| Tax on the credit | The credit is taxable. Notional tax on the credit is deducted at the main rate (25%) for companies paying the main rate, giving a net benefit of 15% of qualifying expenditure, and at the small profits rate (19%) for loss-making companies and companies paying the small profits rate, giving a net benefit of 16.2% |
| Loss-making companies | The credit is still 20%. The amount payable is reduced by notional tax at the small profits rate (19%), so a loss-making company receives a net 16.2% of qualifying expenditure in cash, subject to the cap |
| Refundable | Yes. Payable credits are capped at £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities |
| Subsidised and grant-funded R&D | No reduction: the merged scheme has no subsidised expenditure rule |
| Contracted out R&D | Claimed by the company that made the decision to undertake the R&D; UK location restriction applies |
| Procedure | Claim notification where required, additional information form with every claim, claim in the Company Tax Return within 2 years of the end of the accounting period |
Who it applies to
The merged scheme is open to companies of any size, so the SME tests that divided the old reliefs matter only for ERIS. Large companies, SMEs that are profitable, SMEs that are loss-making but below the 30% intensity threshold, and companies carrying out R&D that was once ineligible because it was subsidised all claim here. Accounting periods that began before 1 April 2024 stay under the legacy rules, so a company with a year to 31 December 2024 claimed its 2024 period under the old SME scheme or RDEC and its first merged scheme period is the year to 31 December 2025.
How it works
The credit is calculated as 20% of qualifying expenditure and brought into the accounts and the tax computation as income. It is then applied in a fixed sequence of steps, which exist to make sure the credit first settles the company's own tax and that any cash paid out is net of tax and within the cap:
- Set the credit against the Corporation Tax liability for the period.
- Deduct notional tax at the main rate or the small profits rate, as applicable; the amount withheld can be carried forward and used against future Corporation Tax.
- Limit the remaining amount to the PAYE and National Insurance cap, carrying any excess forward.
- Set the amount against any other Corporation Tax liabilities of the company.
- Surrender any part to other group companies, if elected.
- Set the amount against other liabilities to HMRC, such as PAYE or VAT.
- Pay the balance to the company.
The cap. The amount payable is capped at £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities for the period. A company is exempt from the cap if its employees are creating, preparing to create or managing intellectual property and no more than 15% of its qualifying expenditure is on connected party subcontractors or externally provided workers.
Going concern. A payable credit requires the company to be a going concern at the time of the claim, on the basis of its latest published accounts.
Worked example
Illustrative example. Kestrel Automation, a hypothetical company paying Corporation Tax at the main rate, has qualifying expenditure of £500,000 for its year to 31 March 2026, a Corporation Tax liability of £80,000 for the period (including the tax charged on the credit itself), and relevant PAYE and National Insurance of £100,000.
| Step | Amount |
|---|---|
| Credit: 20% of £500,000 | £100,000, brought in as taxable income |
| 1 Against Corporation Tax of the period | £80,000 used; £20,000 remains |
| 2 Notional tax at 25% on the remainder | £5,000 withheld and carried forward; £15,000 remains |
| 3 Cap: £20,000 plus 300% of £100,000 | £320,000, not binding |
| 4 to 6 Other liabilities and group surrender | None |
| 7 Paid to Kestrel | £15,000 |
Kestrel's net benefit is £75,000, 15% of qualifying expenditure: the £100,000 credit less the £25,000 of Corporation Tax charged on it. It arrives as £80,000 of tax settled and £15,000 in cash, with £5,000 of withheld credit available against future tax. A loss-making company with the same expenditure would receive a net 16.2%, £81,000, because notional tax is deducted at the small profits rate of 19%. The simple way to think about it: 20% gross, 15% or 16.2% net after tax.
Common questions
We are an SME. Do we still use the merged scheme? Yes, unless you are loss-making and R&D intensive, in which case ERIS may be better. The SME size tests only matter for ERIS.
Is the credit taxable? Yes. It is income for Corporation Tax, which is why the net benefit is 15% for a company paying the main rate and 16.2% for a loss-making company or one paying the small profits rate.
Can a group share the credit? Yes, step 5 allows surrender to group companies.
Does grant funding reduce the claim? No, under the merged scheme. It did under the legacy SME scheme.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.