The merged R&D scheme explained

The merged R&D Expenditure Credit (merged RDEC) is the single R&D tax relief scheme for accounting periods beginning on or after 1 April 2024. It pays a taxable credit worth 20% of qualifying R&D expenditure, which works out at between 14.7p and 16.2p per £1 spent once tax is accounted for. It applies to companies of every size, profitable or loss-making, with one exception: loss-making SMEs that are R&D-intensive can claim at a higher rate under Enhanced R&D Intensive Support (ERIS).

The rates and rules on this page reflect the law in force in August 2026.

What is the merged R&D scheme, and who does it apply to?

The merged scheme is one expenditure credit for companies of every size, and every company claiming R&D tax relief for an accounting period beginning on or after 1 April 2024 uses it, unless it qualifies for ERIS. The old division between the SME scheme and RDEC has gone. A ten-person software company and a listed manufacturer now claim under the same rules, at the same rate.

The date test matters. It is the start of the accounting period that counts, so a 12-month period that began on 1 March 2024 sits entirely under the old schemes. If you are unsure which side of the line you fall, our guide to which R&D scheme applies to your company works through it step by step.

The one carve-out is ERIS. A loss-making SME whose relevant R&D expenditure is at least 30% of its total relevant expenditure claims under ERIS instead, at up to 26.97p per £1 rather than 16.2p.

How does the 20% credit work?

The merged scheme pays an expenditure credit equal to 20% of your qualifying R&D spend, and that credit is itself taxable. It is an “above the line” credit: it is recognised as income in your accounts before the tax charge, so it increases your pre-tax profit and is visible to investors, lenders and boards as part of operating performance. That treatment is carried over from the old RDEC.

For a profitable company, the credit reduces the corporation tax bill. For a loss-making company, it is paid in cash after a series of adjustments described below. In both cases, because the credit is taxable, the headline 20% overstates the true benefit. It does not reduce what that company pays on account: quarterly instalment payments are worked out gross of the credit, and the tax on the credit raises them.

What is the merged scheme worth?

Between 14.7p and 16.2p per £1 of qualifying expenditure, depending on your corporation tax position. Here is the standard worked example on £100,000 of qualifying spend.

Loss-makers do slightly better than main-rate taxpayers: with no profits chargeable at the main rate, the notional tax deducted from their credit is applied at the 19% small profits rate rather than 25%. For an estimate on your own figures, use our claim value calculator. Longer versions of these calculations, including a loss-maker with the PAYE cap checked and a project that produces no claim, are set out in our worked examples.

How do loss-making companies receive the credit?

In cash, after HMRC applies a seven-step process set out in the legislation. For most loss-makers the practical effect is straightforward: notional tax of 19% is deducted at step 2 (this is why the net rate is 16.2p rather than 20p), the PAYE cap is applied at step 3, and the balance is paid to the company. The amount withheld at step 2 is not forfeited: a group company can take it by surrender, and anything not surrendered must be set against the company’s corporation tax for a later period. It only ever discharges tax, though — it is never paid in cash, so a company that stays loss-making does not see it. Terms like notional tax are defined in one line each in the R&D tax relief glossary.

The payment is a genuine cash receipt, not a deferred tax asset. For pre-revenue companies it is often the single largest non-dilutive cash inflow of the year, which is why the claim deserves the same care as a funding round.

What is the PAYE cap?

The cash payable under the merged scheme is capped at £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions for the period. A company with a modest UK payroll and a large subcontracted R&D budget can therefore find its payable credit restricted. The restricted amount is not forfeited: it is carried forward and treated as an expenditure credit to which the company is entitled for the next accounting period, so a lumpy payroll year defers the cash rather than losing it.

Deferred is not the same as banked. The carried-forward amount is added to the next period’s credit and enters the payment steps at step 1, so it goes against that period’s corporation tax first and meets that period’s cap again before any cash is paid — a company whose payroll stays small can see the same amount deferred more than once. The notional tax deduction is not taken twice, though: in working it out, the initial amount of the credit excludes anything added by an earlier period’s carry-forward.

ERIS has no equivalent carry-forward of the credit, and the difference is a trap. Only the loss a company actually surrenders is written off, and nothing reduces that amount to match a capped credit: surrender the full loss, take a capped credit, and the balance of the loss goes with it for no payment. Keeping the loss means surrendering less in the first place, which is why an ERIS claim has to be sized to the cap before it is filed.

There is an exemption. Broadly, a company escapes the cap where its own employees are creating relevant intellectual property, taking steps towards creating it, or managing IP the company holds, and its spending on connected-party subcontracting is low. Whether the exemption applies turns on the detail of your arrangements, and it is one of the points we test early in every engagement.

What changed from the old SME and RDEC schemes?

Four changes matter most in practice.

Grant funding no longer restricts relief. The old subsidised-expenditure rules are abolished. An Innovate UK grant, or any other subsidy, no longer blocks or reduces a merged-scheme claim. Most online guidance still gets this wrong, so we wrote a full correction: grant funding and R&D tax relief.

Contracted-out R&D has a new test. Who claims now turns on what the customer intended or contemplated when the contract was made, set out under how the merged scheme treats contracted-out R&D below.

Overseas costs are restricted. Subcontractor payments qualify only where the R&D is undertaken in the UK, and externally provided workers only where they are subject to UK PAYE and Class 1 NIC, subject to a narrow exception for qualifying overseas expenditure.

One scheme, one rate. Company size no longer determines the scheme (ERIS aside), which removed a whole layer of boundary disputes.

The old schemes still matter for accounting periods that began before 1 April 2024, many of which remain open to amendment until the final deadlines in March 2027. See backdated R&D claims for the windows and R&D tax relief rates by year for the historical rates.

Which costs qualify?

The main categories are staffing costs (apportioned to R&D activity), externally provided workers from unconnected providers at 65% where they are subject to UK PAYE and Class 1 NIC, payments to unconnected subcontractors at 65%, consumables used up in the R&D, software, data and cloud computing costs, and payments to clinical trial volunteers. Capital expenditure, rent and patent costs do not qualify for the credit, though capital spending on R&D can instead attract R&D allowances. The full category-by-category breakdown is in which costs qualify for R&D tax relief.

The costs only count if the underlying project qualifies: a project seeking an advance in a field of science or technology through the resolution of scientific or technological uncertainty that a competent professional could not readily resolve. That definition does more work than any rate, and we set it out in full in what counts as qualifying R&D.

How does the merged scheme treat contracted-out R&D?

By statute rather than by who paid the invoice. Where R&D is contracted out, the customer claims only where it is reasonable to assume, from the contract and the surrounding circumstances, that the customer intended or contemplated when it entered the contract that R&D of that sort would be undertaken; otherwise the contractor claims in its own right. Payments to unconnected subcontractors qualify at 65%. A contractor also claims in its own right where its customer is not acting in the course of a trade, profession or vocation within the charge to UK tax, or is a body that cannot claim the relief itself, such as a university or a health service body.

The same R&D cannot be claimed twice, so relief taken on the wrong side of a contract is an incorrect claim, and the contract rather than the payment decides which side that is. The detail, including contract drafting implications, is in contracted-out R&D: who claims?.

How do you claim under the merged scheme?

Three compliance steps, in order, and the first is the one that catches companies out.

1. Check whether you must notify HMRC in advance. First-time claimants, and companies that have not claimed in the three years ending with the notification deadline, must submit a claim notification within six months of the end of the period of account. Miss the window and the claim is invalid, even if the amendment deadline is still open. The detail, including a wrinkle affecting companies whose last claim was an amendment, is in our guide to the claim notification requirement.

2. Submit the Additional Information Form. The AIF has been mandatory for claims made on or after 1 August 2023 — in practice 8 August 2023. It must reach HMRC before or with your CT600, and it names your senior internal R&D contact and every agent involved in the claim. See the Additional Information Form explained.

3. File the claim in the CT600. The credit is then processed, and for loss-makers paid, subject to the steps above. The seven steps have their own boxes on the CT600L: how to enter the claim on the CT600 and CT600L follows them down the form.

HMRC checked around one in six R&D claims in 2023-24, its latest published figure, so the claim should be prepared from the outset as if it will be read by a compliance officer, because there is a fair chance it will be. Our page on HMRC R&D enquiries explains what a check involves and how to respond.

How the credit is presented in your statutory accounts — above the line as operating income, what lands in the tax charge, and the judgement calls to settle with your auditor — is covered in accounting for the merged credit under FRS 102. Where the treatment differs under FRS 105, IFRS or FRS 101 is covered in its companion page.

Talk it through with a chartered adviser

The merged scheme is simpler than the system it replaced, but the compliance apparatus around it is stricter, and the cost of a casual claim is an enquiry. LimestoneGrey is a firm of Chartered Tax Advisers and Chartered Accountants, regulated by ICAEW, specialising in R&D tax relief. Every claim we prepare is signed off by a chartered adviser before it reaches HMRC. Enquiry support is included as standard.

If you want a considered view on your position under the merged scheme, get in touch for an initial conversation, or start with the wider R&D tax relief guide.

Sources

• Merged scheme & ERIS guidance — the 20% merged credit rate, the PAYE cap and the ERIS alternative.
• CIRD140000: PAYE cap — the £20,000 plus 300% cap and its exemption.
• CIRD112100: payment steps — the seven-step process, the step 3 carry-forward of the amount restricted by the PAYE cap, and confirmation that no fresh claim is needed for the carried-forward amount.
• CTA 2009 s1042I — the seven steps in order: discharge of the company’s corporation tax for the period at step 1, the notional tax deduction at step 2, the PAYE cap at step 3, and cash paid to the company only at step 7.
• CTA 2009 s1042J — subsection (2), adding the amount restricted by the cap to the credit for the next accounting period.
• CTA 2009 s1042K — the notional tax deduction taken at step 2, with subsection (9) excluding any amount added under section 1042J from the initial amount it is computed on, so a carried-forward amount is not notionally taxed twice.
• CTA 2009 s1042L — subsection (2), surrender of the whole or part of the deducted amount to another group member; subsection (3), the balance applied in discharging corporation tax for a subsequent accounting period.
• CIRD161000: contracted-out R&D — the intended-or-contemplated test and customers outside UK corporation tax; CIRD162000, HMRC’s worked examples.
• CTA 2009 s1133 — subsection (2)(c), the contracted-out test: it must be reasonable to assume, having regard to the terms of the contract and any surrounding circumstances, that the customer intended or contemplated when entering into the contract that research and development of that sort would be undertaken.
• CTA 2009 s1042F — the contractor’s own claim where the R&D is contracted out to it by an ineligible company (section 1142) or by a person not acting in the course of a trade, profession or vocation within the charge to tax.
• Check what R&D costs you can claim — 65% of payments to unconnected contractors, and of staff provision payments to unconnected providers of externally provided workers.
• Merged scheme RDEC reform (policy paper) — the merged scheme from 1 April 2024, with subsidised-expenditure rules not carried forward.
• Tell HMRC you plan to claim — the six-month claim notification window and three-year test.
• Additional information form guidance — the AIF, mandatory for claims made on or after 1 August 2023 — in practice 8 August 2023 — and filed before or with the CT600.