How is an R&D tax relief claim calculated?

Every scheme works the same way in outline: identify the qualifying projects, add up the qualifying expenditure on them, apply the rate for the scheme and period, then work through how the relief is delivered. The second and fourth steps are where claims are won and lost — the rate is arithmetic, but what enters the expenditure figure, and what the relief actually pays out after tax and caps, are matters of judgement and mechanism.

How an R&D tax relief claim is calculated

The four steps

1. Identify the qualifying projects. A project qualifies where it sought an advance in science or technology through the resolution of scientific or technological uncertainty. This is the part that determines whether there is a claim at all, and it is the part HMRC challenges most.

2. Add up the qualifying expenditure on those projects. Only certain categories of cost qualify, and only to the extent they are attributable to the qualifying R&D. That “to the extent” is doing a great deal of work: staff who spend part of their time on R&D are apportioned, and the basis of the apportionment has to be capable of being explained.

3. Apply the rate. Which rate depends on the scheme and the period. All the figures, and the dates that select them, are in the rate and threshold timeline.

4. Work out what the relief delivers. This is where the headline figure and the cash figure diverge — through taxation of the credit, notional tax, PAYE and NIC caps, and the order in which the relief is applied against liabilities.

Merged scheme: accounting periods beginning on or after 1 April 2024

The credit is 20% of qualifying expenditure and it is taxable income. It is then put through seven steps in order, and each step deals with what is left after the previous one: discharge of the period’s corporation tax, a notional tax deduction, the PAYE and NIC cap, corporation tax of other periods, group surrender, other liabilities owed to HMRC, and finally payment.

The step that moves the number is the notional tax deduction. It is taken at the main rate for a company charged at the main rate or in marginal relief, and at the small profits rate for everyone else — which includes loss-making companies. A 20% credit is therefore worth 15% of qualifying expenditure to a main-rate payer and 16.2% to a loss-maker.

ERIS: accounting periods beginning on or after 1 April 2024

ERIS works through the loss, not through a credit. A loss-making SME meeting the 30% intensity condition takes an additional deduction of 86% of qualifying expenditure, which increases its trading loss, then surrenders that loss for a payable credit of 14.5%.

The surrenderable loss is the lower of the unrelieved trading loss and 186% of the qualifying expenditure. That cap is why a company with very large non-R&D losses cannot convert all of them to cash through an R&D claim.

Where the cap does restrict an ERIS claim, the restricted amount is lost. Under the merged scheme it carries forward. That difference should be checked before the choice is made.

Position for accounting periods beginning before 1 April 2024

Legacy periods are still being claimed, amended and enquired into, so the mechanics remain live.

Legacy SME, profitable. The additional deduction reduces taxable profit. The benefit is the deduction multiplied by the corporation tax rate for the period.

Legacy SME, loss-making. The additional deduction increases the loss; the loss is surrendered for a payable credit; the surrenderable loss is capped at 230% of qualifying expenditure incurred before 1 April 2023 and 186% for expenditure on or after that date.

Legacy RDEC. A taxable credit through seven steps, as the merged scheme now works, but with two differences that change the answer: notional tax at step 2 was taken at the main rate for every claimant, including loss-makers, and the step 3 cap was the company’s total PAYE and NIC in respect of workers engaged in the R&D rather than £20,000 plus 300%.

In a legacy accounting period that straddles 1 April 2023, expenditure is split at that date and each part takes its own rate. The rate and threshold timeline has the figures and a worked split.

What is not in the calculation

Three things people expect to see and do not.

Your corporation tax rate does not change the merged scheme or ERIS cash figure for a loss-maker. Notional tax at step 2 uses the small profits rate for a loss-making merged scheme claimant regardless of what the company’s rate would have been; the ERIS credit is a flat 14.5% of the surrendered loss.

The claim is not a percentage of turnover, headcount or total costs. Those figures appear in the R&D intensity test for ERIS, and nowhere else in the calculation.

There is no minimum claim. The £10,000 minimum expenditure condition was abolished for accounting periods ending on or after 1 April 2012. Small claims are viable; they still have to meet the same evidential standard, which is usually the real constraint.

Worked example

Merged scheme — profitable, main rate

Illustrative figures. Qualifying expenditure of £750,000 in the year to 31 March 2026. Taxable profit before the credit of £1,200,000.


Credit at 20%	£150,000
Taxable profit including the credit	£1,350,000
Corporation tax at 25%	£337,500
Credit applied at step 1 against that liability	£150,000
Corporation tax payable	£187,500

Without the claim the tax would have been £300,000. The claim is worth £112,500 — which is £150,000 less the £37,500 of tax charged on the credit itself, and 15% of the qualifying expenditure.

Merged scheme — loss-making

Same expenditure of £750,000 in the year to 31 March 2026, but the company is loss-making and has PAYE and NIC of £160,000 for the period.


Credit at 20%	£150,000
Step 1: corporation tax of the period	nil, so nothing is discharged
Step 2: notional tax at the small profits rate of 19%	(£28,500)
Net amount carried into step 3	£121,500
Step 3: PAYE and NIC cap — £20,000 + (300% × £160,000)	£500,000, so no restriction
Steps 4 to 6: no other liabilities	—
Step 7: paid to the company	£121,500

That is 16.2% of qualifying expenditure. The £28,500 withheld at step 2 is not lost — it carries forward against corporation tax of a later period, or can be surrendered within the group.

ERIS

Illustrative. Qualifying expenditure of £750,000, trading loss before the R&D deduction of £400,000, PAYE and NIC of £160,000, intensity condition met.


Additional deduction at 86%	£645,000
Trading loss after the deduction	£1,045,000
186% of qualifying expenditure	£1,395,000
Surrenderable loss — the lower of the two	£1,045,000
Payable credit at 14.5%	£151,525
Cap check: £20,000 + (300% × £160,000) = £500,000	no restriction

The same expenditure under the merged scheme would have produced £121,500. Note that the company surrenders £1,045,000 of losses to get £151,525, so the losses are gone; if profits were expected within a year or two, the comparison is not simply £151,525 against £121,500.

Where claims go wrong

Calculating from the headline rate and stopping. Twenty per cent is a gross, taxable credit. The figure a client should be told is the net one, with the basis stated — and it differs between a profitable company and a loss-maker.
Using 25% notional tax for a loss-making merged scheme claimant. It is the small profits rate. Carrying the old RDEC arithmetic across understates the claim by 1.2 percentage points of qualifying expenditure.
Overlooking the surrenderable loss cap. A company with large non-R&D losses cannot surrender them all. The cap of 186% of qualifying expenditure is checked in the computation, and a claim built without it will be reduced on processing.
Time apportionment that cannot be explained. The rate is never the problem in an enquiry; the expenditure figure is. A staff cost apportioned at “about 60%” with nothing behind it is the most common single reason a claim is reduced, and the number it produces is often defensible — it is the absence of a method that is not.
Applying the cap before the notional tax deduction. The steps run in order. Reversing steps 2 and 3 produces a different, wrong answer whenever the cap bites.