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
The £20,000 is a floor every claimant gets, proportionately reduced 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.
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 RDEC for the next accounting period, so the value is deferred rather than forfeited. Under ERIS there is no equivalent carry-forward: HMRC’s manual states that a claim for a credit above the cap is invalid, and the statute caps the credit at the lesser of 14.5% of the surrenderable loss and the cap itself. Either way, 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, but only by meeting two conditions, and both have to hold.
The first 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 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.
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.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
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.
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.