The PAYE cap limits the payable credit a company can receive in a period to £20,000 plus 300% of its relevant PAYE and National Insurance contributions. It applies to cash credits under both the merged scheme and ERIS, and it bites hardest on one profile in particular: a company with a small payroll that subcontracts most of its R&D out.
How the cap is worked out
CTA 2009 s1112B sets the figure. The £20,000 is a floor every claimant gets, proportionately reduced under s1112B(3) for accounting periods shorter than twelve months. On top of it sits 300% of relevant PAYE and NIC, so a company with £50,000 of relevant PAYE and NIC for the period can take up to £170,000 in cash before the cap restricts anything.
“Relevant” is doing real work in that phrase. The figure is not simply what appears on your own payroll returns. Where a connected company supplies you with externally provided workers, or carries out contracted-out R&D for you, that company’s PAYE and NIC attributable to what it supplied is added to your figure. Where you are the supplier, providing workers or contracted R&D to a connected company, your own PAYE and NIC attributable to what you supplied comes out again. In a group, the cap has to be computed across those flows rather than read off a single company’s payroll.
Claiming under both schemes in the same period is uncommon, and it is never a way of relieving the same spending twice: a company cannot claim both schemes on the same expenditure. What it can do is split. Where expenditure cannot go into an ERIS claim — the de minimis limits applying in certain sectors are HMRC’s own example — that expenditure can go into a merged-scheme claim instead, on those rules. Each claim needs its own Additional Information Form.
Where that happens, the company gets one cap, not two. Section 1112B(4) reduces the merged-scheme cap by any R&D tax credit already obtained under Chapter 2 for the period, so the two claims share a single £20,000 plus 300%: the ERIS credit comes off the headroom before the merged-scheme credit is tested against what is left.
Which companies run into it is fairly predictable, because it comes down to a small UK payroll set against substantial R&D spend. That combination shows up most often in:
- early-stage companies paying founders and technical staff in equity rather than salary
- groups where the people doing the R&D are employed by a different entity from the claimant
- companies putting most of the work through subcontractors and agency workers
What happens when the cap bites
The consequence depends on the scheme, and the difference is not cosmetic. Under the merged scheme, the excess over the cap is carried forward and treated as an expenditure credit for the next accounting period, so the value is deferred rather than forfeited. Under ERIS there is no equivalent carry-forward of the credit. Section 1058(1) caps it at the lesser of 14.5% of the surrenderable loss and the cap, and HMRC’s manual goes further, treating a claim for a credit above the cap as invalid rather than merely restricted. A company that files one has to amend, and the window closes two years after the end of the period of account; past that, only an officer can let it in.
That is not the same as losing the benefit, but whether the loss survives is the company’s decision, not the cap’s. A company chooses how much of its surrenderable loss to surrender. Only the amount surrendered is written off, and nothing reduces that amount to match a capped credit. Surrender the full loss against a capped credit and the balance is gone for nothing. Surrender only what the cap will pay for and the rest carries forward for relief against future profits. What the cap changes is the form and the timing — cash at 14.5p per £1 of loss now, against relief at the corporation tax rate whenever profits arrive. For a pre-revenue company that can be a long wait, which is why sizing an ERIS claim correctly before filing is a compliance question, not an arithmetic tidy-up afterwards.
The exemption, and what it demands
A company can be exempt from the cap altogether under s1112E, but only by meeting the two conditions that section sets, A and B, and both have to hold.
The first, condition A, concerns intellectual property. The company must be doing one of three things: taking or preparing to take steps so that relevant intellectual property will be created by it, creating it, or performing a significant amount of management activity in relation to relevant IP it holds. Whichever applies, the activity has to be wholly or mainly undertaken by employees of the company, so work by directors counts only where those directors are employees. Where the company relies on the management limb, HMRC’s position is that the IP being managed must be owned by the company — an exclusive licence over someone else’s will not do; where it relies on creating IP, the statutory test is that the right to exploit what is created vests in the company, alone or jointly. And the condition cannot be met by subcontracting the R&D out, which is rather the point of it: the company’s own people have to be doing the creative work.
The second, condition B, is a 15% limit. Spend on subcontractors and externally provided workers supplied by connected parties — including parties who have jointly elected to be treated as connected — must not exceed 15% of the company’s qualifying R&D expenditure. Read that precisely — it counts connected-party spend only, so heavy use of unconnected subcontractors does not fail this limb by itself, although a company that has contracted the creative work out tends to fail the first limb instead.
Relying on the exemption also has to be declared. The Additional Information Form requires the company to state whether the claim relies on s1112E, or on s1058D for an old-scheme period, and where it does, its reasons for taking that view. So the exemption is a position argued to HMRC on the form, not a conclusion left in the working papers.
Where to go next
If your claim is a cash claim and your payroll is small relative to your R&D spend, model the cap before the year end rather than after the return has gone in. Both exemption conditions turn on facts — who owns the IP, who employs the people doing the work, how much goes to connected parties — that are far easier to get right in advance than to fix later. The 30% intensity condition is worth testing at the same time, because an ERIS claim turns on both — subject to the one-period grace where the company met the intensity condition and obtained relief in its most recent prior twelve-month period.
One period boundary is worth naming. Claims for accounting periods beginning before 1 April 2024, which remain within the amendment window into 2027, sit under the earlier SME cap provisions rather than the ones set out here, and those differ in detail. A backdated claim needs the cap worked out on the rules for its own period.
Sources
- CIRD140000: PAYE cap — HMRC’s manual on the cap, the relevant PAYE and NIC figure and the exemption conditions.
- R&D tax relief: the merged scheme and ERIS — how the cap applies to payable credits under each scheme.
- CTA 2009 s1112B — the cap of £20,000 plus three times relevant PAYE and NIC, with the £20,000 proportionately reduced at subsection (3) for periods shorter than twelve months and subsection (4) reducing the cap by any Chapter 2 credit obtained for the same period.
- CTA 2009 s1112E — the exemption: condition A on relevant intellectual property created by the company’s own employees, and condition B’s 15% limit on connected-party contractor and externally provided worker spend.
- CTA 2009 s1058 — subsection (1), which sets the Chapter 2 credit at the lesser of 14.5% of the surrenderable loss and the cap.
- CTA 2009 s1062 — carried-forward losses reduced by the loss in respect of which the company claims a tax credit, measured by the claim rather than by the cash received.
- CIRD122000: surrenderable loss — the company may claim in respect of all or part of the surrenderable loss.
- FA 1998, Schedule 18, paragraph 83E — the time limit for making, amending or withdrawing an R&D claim, running to two years from the last day of the period of account, with sub-paragraph (5) leaving anything later to an officer’s discretion.
- SI 2023/813, Schedule 2 — paragraph 9, requiring the Additional Information Form to disclose reliance on s1112E or s1058D and the company’s reasons for it.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.