R&D tax relief is the most valuable incentive most UK companies will ever claim, and the 2024 merger of the old SME scheme and RDEC into a single regime changed the arithmetic for everyone. The merged scheme pays a 20% above-the-line credit for most companies, with a higher 27% rate reserved for R&D-intensive SMEs. The practical question for a finance director is not whether the work qualifies but how much cash the claim releases and when.
How the credit is calculated
The starting point is qualifying expenditure — staff costs, consumables, software, data licences, cloud computing, and 65% of payments to overseas subcontractors. Under the merged scheme the company deducts the expenditure as normal and then claims a credit of 20% of the qualifying spend, net of the notional tax already relieved. For a loss-making company the credit is payable in cash rather than carried forward, which is what makes the scheme valuable to startups.
A worked example
A company spends £500,000 on qualifying R&D in the year. Under the merged scheme the above-the-line credit is 20% of £500,000, or £100,000, before the notional tax adjustment. If the company is profitable and paying corporation tax at 25%, the net benefit is the credit less the tax that would otherwise have been due on the deduction, which lands the effective benefit in the region of £62,500. A loss-making company surrenders the loss for a payable credit at a lower rate, receiving cash instead of a future deduction.
Assumptions and related tools
Rule year 2024/25. The merged scheme rate is 20% above the line; the R&D-intensive SME rate is 27%. The notional tax adjustment, the PAYE/NIC cap on payable credits, and the additional deduction for R&D-intensive SMEs are not modelled in full. The claim must be made within two years of the end of the accounting period and supported by a technical report. Corporation tax, IR35 status, and self-assessment penalties are the natural companion calculators. Source: HMRC, Research and Development tax relief.