Short answer
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.
Applies to
- Schemes
- Merged scheme · ERIS · Legacy SME · Legacy RDEC
- Periods
- 1 April 2015 onwards
- Claimants
- All
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 where the company has profits charged at the main rate — and would have them even leaving the credit itself out of account — and at the small profits rate in every other case, which includes loss-making companies. A company in marginal relief has profits charged at the main rate, so it takes the main rate here too.
That gives the two figures usually quoted: a 20% credit is worth 15% of qualifying expenditure to a main-rate payer and 16.2% to a loss-maker. Neither figure is the answer for a profitable company whose profits fall in the marginal relief band, and neither is the answer for a profitable company under the small profits limit — see the section below.
What the credit is worth if you are profitable: it depends on your corporation tax band
For a profitable company, step 1 usually absorbs the whole credit against the corporation tax of the period, so the notional tax deduction at step 2 never bites. What determines the benefit instead is much simpler: the credit is taxable trading income, so it increases your taxable profit, and the cost of the claim is the extra corporation tax that increase produces. That extra tax is charged at your marginal rate, not your average one.
Since 1 April 2023 there have been three marginal rates, so there are three answers. Illustrated on £100 of qualifying expenditure, producing a £20 credit:
| Profits fall | Marginal rate on the credit | Tax on a £20 credit | Net benefit |
|---|---|---|---|
| Below the small profits limit | 19% | £3.80 | 16.2% of qualifying expenditure |
| In the marginal relief band | 26.5% | £5.30 | 14.7% of qualifying expenditure |
| Above the upper limit | 25% | £5.00 | 15.0% of qualifying expenditure |
The 26.5% in the middle is not a typo and it is not an average. Marginal relief works by reducing the main-rate charge by a fixed fraction of the shortfall below the upper limit, and the arithmetic of that produces a constant 26.5% on every extra pound of profit across the whole band — it does not taper back down towards 25% as profits approach the upper limit. The limits, the fraction and the periods they apply to are in the rate and threshold timeline.
So the widely quoted “15%” assumes a company comfortably over the upper limit. A company in the band keeps less than that, and a company under the lower limit keeps more.
The limits are not the same for every company. The small profits and upper limits are divided by the number of associated companies plus one, and reduced proportionately for accounting periods shorter than 12 months. A standalone company is in the band between £50,000 and £250,000 of profits; a company with three associates is in it between £12,500 and £62,500. Marginal-band claimants are far more common in group and family-company structures than the headline limits suggest.
Watch the credit moving you across a threshold
Because the credit is added to trading income before the corporation tax calculation, the credit can be the thing that changes which band you are in. The band that matters is the one your profits land in after the credit is added, not the one they were in before, and where the credit straddles a limit the benefit is a blend of two rates.
Take a company with profits of £40,000 before the claim — under the small profits limit — and qualifying expenditure of £100,000. The £20,000 credit takes taxable profit to £60,000, which is inside the marginal relief band. The first £10,000 of the credit is taxed at 19% and the next £10,000 at 26.5%, giving £4,550 of extra tax and a net benefit of £15,450, or 15.45% of qualifying expenditure. Neither 16.2% nor 14.7% would have been right.
One thing the legislation does protect you from: the credit cannot, by itself, push you onto the main rate for the purpose of the step 2 notional tax deduction. That test is applied ignoring the credit. It offers no protection at all in the corporation tax computation itself, which is where the effect above arises.
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 — and for a period falling wholly or partly in financial year 2023 or later, that is the marginal rate on the profits being relieved, which raises the same three-band point made above in reverse. A deduction that takes profits down through the band relieves tax at 26.5%, not 25%.
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. For a profitable company the position is the opposite — the corporation tax band is exactly what determines the figure.
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 — profitable, marginal relief band
Illustrative figures, for a standalone company with no associates. Qualifying expenditure of £200,000 in the year to 31 March 2026. Taxable profit before the credit of £120,000.
| Credit at 20% | £40,000 |
| Corporation tax without the claim, on £120,000 | £28,050 |
| Taxable profit including the credit | £160,000 |
| Corporation tax with the claim | £38,650 |
| Extra corporation tax caused by the credit | £10,600 |
| Net benefit — £40,000 less £10,600 | £29,400 |
That £10,600 is 26.5% of the credit, and the £29,400 is 14.70% of the qualifying expenditure. Quoting this claim at 15% overstates it by £600.
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.
- Quoting 15% to a company in the marginal relief band. It is 14.7%. The error is small in percentage terms and not small in a board paper, and it is the single most common overstatement we see in forecasts prepared by non-specialists — because 15% is the figure every summary of the merged scheme repeats.
- Deciding the band before adding the credit. The credit is trading income. Test the band on the profits that include it, and where it straddles a limit, blend the two rates rather than picking one.
- Forgetting to divide the limits by the associated companies. A company with three associates enters the marginal band at £12,500 of profits. Applying the standalone £50,000 limit to a family group puts most of its companies in the wrong band and every net figure with them.
- 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.
John Mapother
Founder & Director
Last reviewed 9 September 2026