UK R&D Tax Credits for Small Companies 2026: RDEC & Merged Scheme Guide

R&D tax credits are one of the most underutilised reliefs available to UK small companies. From April 2024, the old SME R&D scheme and RDEC were merged into a single regime with a 20% above-the-line credit rate. For non-resident founders of UK tech, product, and software companies, understanding this relief and claiming it correctly can significantly reduce the effective corporation tax bill — or generate a cash payment from HMRC.

What Changed in April 2024

Before April 2024, UK R&D relief operated through two parallel schemes:

• SME R&D Relief: For small and medium enterprises — offered a 186% enhanced deduction and a 10% cash credit for loss-makers
• RDEC (Research and Development Expenditure Credit): For large companies — an above-the-line credit of 20%

From 1 April 2024, these merged into a single scheme. The merged scheme uses the RDEC above-the-line credit approach at 20%, applied to both SMEs and large companies. The change simplified the system but reduced the benefit for many SMEs that previously used the more generous SME scheme.

Alongside the merged scheme, a separate Enhanced R&D Intensive Support (ERIS) scheme was introduced for loss-making SMEs with very high R&D intensity (spending ≥ 30% of total expenditure on R&D).

Who Qualifies

To claim UK R&D tax relief, a company must:

• Be a UK company subject to corporation tax
• Carry out qualifying R&D activities (see below)
• Not be a charity, partnership or unincorporated association

There is no minimum size, sector, or nationality requirement for the company's directors or shareholders. A UK company with entirely non-resident founders and overseas customers can still claim if it carries out qualifying UK R&D work.

Prior notification requirement (from August 2023): Companies claiming R&D relief for the first time must notify HMRC of their intention to claim within 6 months of the end of the accounting period in which the R&D took place. This is done online via HMRC. Missing this window means the claim cannot be made for that period.

What Counts as R&D?

HMRC defines qualifying R&D using the BIS Guidelines. Key criteria:

• The project must seek to advance overall knowledge or capability in science or technology
• It must involve resolving scientific or technological uncertainty — the solution cannot be readily deduced by a competent professional in the field
• It must be in a field of science or technology (not arts, humanities, or social sciences)

In practice, this includes:

• Software development involving novel algorithms, new approaches to data processing, or solving technical problems without existing solutions
• Hardware or product development involving genuinely new engineering solutions
• AI/machine learning where the approach extends beyond applying existing frameworks
• Manufacturing process improvements involving technical rather than commercial uncertainty

It does not include routine software development, replication of existing products, or commercial uncertainty about whether a product will sell.

Eligible Costs

Under the merged scheme, eligible costs include:

Cost Category	Eligible Portion	Notes
Employee costs	100%	Salaries, employer NI, pension of staff directly involved in R&D
Externally provided workers (EPW)	65%	Contractors via staffing agency working on R&D
Consumable items	100%	Materials, heat, light and power used directly in R&D
Software	100%	Software used directly in the R&D process
Cloud computing & data	100%	From April 2023 onwards
Subcontracted R&D (UK-based)	65%	Must be UK-based from April 2024 in most cases
Subcontracted R&D (overseas)	Generally 0%	Only eligible if overseas location is necessary for regulatory/geographic reasons
Capital expenditure	0%	Not eligible (but may qualify for other capital allowances)

The Merged Scheme: How the Credit Works

The 20% merged scheme credit works as follows:

1. Calculate your qualifying R&D expenditure (eligible costs above)
2. The credit = 20% of qualifying spend — this is an above-the-line credit, meaning it reduces your company's tax charge directly rather than adjusting taxable profits
3. If you have sufficient corporation tax liability, the credit reduces it pound for pound
4. If the credit exceeds your tax liability, the excess can be carried back, carried forward, or (subject to a PAYE/NI cap) paid to you as a cash repayment

Example: UK tech company spends £200,000 on qualifying R&D in 2025/26. R&D credit = £40,000. If the company's CT liability is £30,000, the credit reduces it to £0 with £10,000 potentially available as a cash repayment (subject to PAYE cap).

ERIS: For R&D-Intensive Loss-Makers

The Enhanced R&D Intensive Support (ERIS) scheme is available to SMEs that are loss-making and spend at least 30% of total expenditure on qualifying R&D. Under ERIS:

• A 86.5% enhanced deduction (vs the standard 100% deduction for non-ERIS companies)
• A 14.5% above the line credit for losses — meaning approximately £27 cash back per £100 of qualifying R&D spend for loss-making companies

ERIS is primarily aimed at early-stage, R&D-intensive startups that are burning cash on development. The 30% R&D intensity threshold is calculated as qualifying R&D expenditure ÷ total relevant expenditure.

How to Claim

1. Notify HMRC — if this is your first claim, notify within 6 months of accounting period end (online)
2. Prepare a technical narrative — a written description of the R&D activities, the uncertainties addressed, and how they meet HMRC's definition. This is a mandatory part of the claim from August 2023.
3. Calculate qualifying costs — work with your accountant or R&D specialist to identify and document all eligible expenditure
4. Complete CT600 supplementary pages — the R&D credit is claimed on form CT600L (merged scheme) or CT600C (RDEC) as part of the corporation tax return
5. File within the claim window — claims must be made within 2 years of the end of the accounting period

HMRC has significantly increased scrutiny of R&D claims following widespread abuse in 2021–2023. Use a reputable accountant or specialist R&D advisor rather than a "no win no fee" claims firm, as HMRC enquiries into poorly documented claims can be time-consuming and costly.

Further reading: UK Tax for Non-Residents: Complete Guide Getting UK Company Profits to China: Tax-Efficient Methods.

Frequently Asked Questions