What is the PAYE and NIC cap on the R&D tax credit?

How the cap is calculated

The cap is £20,000 plus three times your company’s “relevant PAYE and NIC liabilities” for the accounting period — the PAYE income tax and Class 1 National Insurance contributions the company was actually required to account to HMRC for, for the payment periods falling in the accounting period. If the accounting period is shorter than 12 months, the £20,000 element is reduced proportionately; the three-times multiplier isn’t.

“Relevant” PAYE and NIC liabilities aren’t simply your whole payroll bill — it’s built around who actually did the R&D:

• Your own employees’ PAYE and NIC counts in full.
• Where you use externally provided workers from a connected staff provider, a proportionate share of the provider’s PAYE and NIC for those specific workers counts toward your cap.
• Where you subcontract R&D to a connected contractor, a proportionate share of the contractor’s own staffing-cost PAYE and NIC — attributable to the R&D they did for you — counts toward your cap too.
• Correspondingly, if your company is the one supplying externally provided workers or doing subcontracted R&D for a connected company, your own PAYE and NIC is deducted back out where it’s already been counted toward the other company’s cap, so the same liability isn’t counted twice across a connected group.

If you claim under both the merged scheme and Chapter 2 (SME/ERIS) for the same period — which can happen for a company with some qualifying activity under each — the merged-scheme cap is reduced by whatever R&D tax credit you’ve already obtained under Chapter 2, so the same PAYE/NIC headroom can’t be used to support two separate uncapped claims.

What happens if your claim exceeds the cap

This is where the two schemes genuinely part ways, and it’s worth being precise.

Under the merged scheme, an excess over the cap isn’t lost — it rolls forward. The amount that would otherwise exceed the cap is instead added to whatever R&D expenditure credit you’re entitled to for your next accounting period, even if that next period would otherwise generate no credit at all. You don’t get the cash this year, but you don’t lose the value either — you get it a year later, alongside whatever else that later period generates.

Under the SME scheme and ERIS, there’s no equivalent automatic carry-forward of the credit itself — a claim for tax credit above the cap simply isn’t valid. But that doesn’t mean the underlying loss disappears. The surrenderable loss you’d otherwise have converted into a payable credit doesn’t have to be surrendered at all — to the extent it isn’t (whether by choice, or because the cap stops you from converting all of it), it remains available as an ordinary trading loss, carried forward under the normal loss rules, in the same way as any other trading loss not relieved elsewhere or surrendered under group relief. What you lose, in practical terms, is the enhanced cash-now value of a payable credit on that portion — not the loss itself, which can still be relieved against future trading profits (or, where the conditions are met, group relief) in the ordinary way.

In other words: hitting the cap under the merged scheme is a timing problem — the money’s a year later. Hitting it under SME/ERIS is a value problem — the amount that can’t be surrendered for cash reverts to being an ordinary loss, worth less to a company than the 14.5% cash credit would have been, and only useful once the company has profits to relieve it against (or a group member that can use it).

The exemption for companies genuinely creating or managing their own IP

There’s a complete exemption from the cap — not a higher limit, no cap at all — for a company that meets two conditions together:

Condition A — real, in-house IP activity. The company must be taking steps toward creating relevant intellectual property, actually creating it, or carrying out a significant amount of management activity in relation to IP it already holds — and that activity has to be wholly or mainly carried out by the company’s own employees, not directors who aren’t employees and not an outsourced team. “Intellectual property” here is defined broadly — patents, trademarks, registered designs, copyright, design rights, plant breeders’ rights, foreign equivalents, and even unprotected information or techniques with real industrial or commercial value — and the IP has to be one the company itself would hold the right to exploit, whether alone or jointly.

Condition B — limited connected-party subcontracting. The company’s qualifying expenditure on externally provided workers or subcontracted R&D, where the worker provider or contractor is connected to the company (or has jointly elected to be treated as connected), must not exceed 15% of the company’s total qualifying expenditure for the period.

Meet both, and the cap doesn’t apply at all, no matter how small your payroll or how large your claim. This exemption is aimed squarely at genuinely IP-generating businesses that structure a meaningful part of their R&D through connected companies or contractors — a common shape for group structures — without being penalised by a cap built around a headcount proxy that doesn’t fit their model.

Position for periods beginning before 1 April 2024

A PAYE/NIC cap on the SME scheme’s payable credit was introduced for accounting periods beginning on or after 1 April 2021, aimed at the same abuse the current cap targets — claims with very little genuine UK employment behind them. It operated under different section numbers to the current shared mechanism and predates the merged scheme entirely; the RDEC scheme that predated the merged scheme was never itself subject to an equivalent cap. If you’re dealing with a legacy SME claim from an accounting period beginning on or after 1 April 2021 but before 1 April 2024, the cap applied in broadly the same shape described above, but check the specific legacy provisions rather than assuming the current section numbers and figures translate exactly.

How this interacts with the rest of your claim

The excess-over-cap mechanics described above sit inside the wider process of turning a claim into cash — see What does it mean for an R&D tax credit to be “above the line” or “below the line”? Where the cap sits among the merged scheme’s other steps, and how and when do I actually receive R&D tax relief money? What happens after the cap has been applied. Group companies juggling the cap across several connected entities should also read How does group relief interact with an R&D claim?.