Last update March 2026

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The UK’s R&D tax relief system has undergone its biggest overhaul in two decades. From April 2024 onwards, the traditional SME and RDEC schemes were replaced by the Merged Scheme and a new enhanced relief for innovative SMEs called ERIS (Enhanced R&D Intensive Support). As we move through 2026, this framework is now fully embedded, and HMRC has added important new compliance measures you must know about.

This 2026 guide explains how the current system works, who qualifies, what has changed since last year, and how to maximise your claim with the latest HMRC rules, including the new Spring 2026 Advance Assurance Pilot and updated compliance expectations.

What Changed?

The core Merged Scheme and ERIS rates remain unchanged from April 2024. However, several significant compliance and procedural updates apply in 2026:

• Merged Scheme rate: 20% taxable credit (unchanged)
• ERIS effective benefit: ≈27% cash for qualifying loss-making SMEs (unchanged)
• ERIS R&D intensity threshold: 30% of total expenditure (unchanged)
• HMRC Advance Assurance Pilot launched for SMEs, get clarity before filing
• Intra-group RDEC payment rules clarified by Finance Bill 2025-26, payments are no longer taxable income for surrendering companies
• HMRC significantly ramping up R&D enquiries and director accountability checks in 2026
• AIF (Additional Information Form) remains mandatory, must be submitted before CT600
• Digital-only submission via HMRC portal, no paper claims accepted
• Claim Notification still required for first-time or lapsed claimants (within 6 months of year-end)
• Overseas subcontractor/EPW costs remain largely restricted
• Cloud, data, and AI/ML costs remain formally included as qualifying expenditure
• PAYE/NIC cap continues to apply to payable credits

Understanding the UK R&D Tax Relief System in 2026

1. The Merged Scheme (Main Scheme)

Applies to: Accounting periods starting on or after 1 April 2024

Who can claim: All UK Corporation Tax – paying companies, except those qualifying for ERIS

Benefit Rate

• 20% taxable credit on qualifying R&D spend
• After Corporation Tax at 25% → net benefit ≈ 15p per £1 spent
• If on 19% CT rate → net benefit ≈ 16.2p per £1 spent

Key Features

• Above-the-line credit- visible in your profit & loss accounts
• No subsidised cost restrictions (grants no longer push you to a lower rate)
• The company that decides to carry out R&D claims- not the subcontractor
• Overseas R&D costs disallowed unless legal or geographical necessity can be proven
• PAYE/NIC payable credit cap applies

2. Enhanced R&D Intensive Support (ERIS)

ERIS is designed specifically for loss-making SMEs with high R&D intensity. If you qualify, it is almost always more beneficial than the Merged Scheme.

Eligibility- You Must Meet ALL of the Following:

• Fewer than 500 employees
• Turnover ≤ €100m OR gross assets ≤ €86m
• R&D expenditure is ≥ 30% of total company expenditure (including connected companies)
• The company is loss-making for the period

Benefit Rate

• 186% total deduction on qualifying costs (100% standard + 86% enhanced)
• 14.5% payable tax credit on surrenderable loss – not taxable
• Effective cash benefit: ≈27% of qualifying spend

ERIS Grace Period

If your R&D intensity drops below 30% in the current period, you can still claim ERIS provided you met the 30% condition in the previous 12-month accounting period and made a valid ERIS or SME claim in that period.

IMPORTANT 2026: Even if you qualify for ERIS, you can opt to claim under the Merged Scheme instead — but you cannot claim both for the same expenditure.

2026 R&D Tax Credit Rates at a Glance

Feature	Merged Scheme	ERIS	Old SME (pre-Apr 2024)
Who Qualifies	All companies	Loss-making SMEs ≥30% R&D intensity	SMEs only (now closed)
Credit Rate	20% taxable	86% deduction + 14.5% credit	130% deduction / 14.5% credit
Net Benefit (25% CT)	≈15%	≈27%	≈18.6% (profit) / 33% (loss)
Credit Taxable?	Yes	No (payable credit)	Payable credit not taxable

Note: The old SME scheme is closed for accounting periods starting on or after 1 April 2024.

Who Can Claim R&D Tax Credits in 2026?

Any UK company can claim if it:

• Pays UK Corporation Tax
• Is carrying out qualifying R&D work
• Has incurred allowable costs on that R&D work

Project success does not matter. Only the attempt at scientific or technological advancement counts. Even if your project fails completely, you can still claim, provided you were trying to resolve a genuine technical uncertainty.

Industries That Commonly Qualify

• Software development and SaaS platforms
• Artificial intelligence, machine learning and data science
• Life sciences, pharmaceuticals and medical devices
• Advanced manufacturing and engineering
• Construction technology and sustainable materials
• Fintech and cybersecurity
• Food technology, agri-tech and clean energy

What Counts as R&D? (HMRC’s Definition)

HMRC defines R&D using the Department for Science, Innovation and Technology’s (DSIT) guidelines. A qualifying project must:

• Seek a scientific or technological advance- not just a business advance or process improvement
• Attempt to resolve technical uncertainty- the solution must not be readily deducible by a competent professional in the field
• Be carried out by competent professionals
• Have documented records of approach, tests, failures and outcomes

Practical Examples of Qualifying Work

• Developing new or improved software algorithms that address a technical limitation
• Building and training AI or ML models to solve a non-obvious technical problem
• Creating new sustainable construction materials with novel properties
• Improving manufacturing processes beyond existing industry knowledge
• Testing new chemical formulations, pharmaceuticals or advanced prototypes
• Enhancing cybersecurity architecture to counter novel attack vectors
• Developing automated data pipelines or cloud infrastructure with novel technical approaches
• Creating bespoke integrations where off-the-shelf tools cannot solve the problem

What Does NOT Qualify

• Routine testing or quality assurance that follows standard procedures
• Market research, user experience research, or consumer preference studies
• Cosmetic design changes or aesthetic improvements
• Commercial production activities once technical uncertainty is resolved
• Work that applies existing technology without technical advance

Qualifying R&D Expenditure in 2026

Allowable Costs

Staff Costs

• Gross salaries, employer National Insurance Contributions (NICs), and pension contributions
• Staff must be directly engaged in R&D or managing/supporting R&D activity
• Bonuses can be included if they are paid to employees directly involved in R&D
• In specific circumstances, a proportion of administrative or support staff costs can be claimed if their work directly relates to an R&D project (updated HMRC guidance January 2026)
• Directors’ salaries processed through PAYE qualify and count toward the PAYE/NIC cap calculation

Subcontractor Costs

• 65% of payments to unconnected subcontractors are qualifying (UK-based preferred)
• Connected subcontractors: you can claim the relevant R&D costs incurred by the connected entity (not just 65%)
• The company commissioning the R&D (bearing the risk and making the decision) claims, not the subcontractor doing the work
• Subcontractors based overseas are generally not qualifying unless geographic or legal necessity applies

Externally Provided Workers (EPWs)

• 65% of EPW costs where the EPW provider is an unconnected party
• EPWs based overseas are restricted, only UK-based EPW costs qualify in most cases
• Correctly classifying workers as subcontractors vs EPWs is critical, HMRC scrutinises this

Consumables

• Materials, chemicals, prototypes, and utilities directly used in R&D activity
• Materials that are incorporated into a product that is ultimately sold may be partially restricted

Software, Cloud & Data Costs

• Software licences and SaaS costs directly used in R&D
• Cloud computing costs (AWS, Azure, GCP etc.) for R&D workloads, apportioned if mixed use
• Data licences used specifically in R&D projects
• AI/ML training datasets formally qualify as qualifying expenditure

Restricted or Non-Qualifying Costs

• Overseas R&D costs (subcontractors or EPWs) unless legal or geographical necessity is demonstrated with evidence
• Capital expenditure, though this may qualify for capital allowances separately
• Routine testing and standard quality procedures
• Market research, sales, and commercial activities
• Rent, general overheads not attributable to R&D
• Production activities once the technical uncertainty has been resolved

PAYE/NIC Credit Cap-Critical for Startups

Payable credits under both the Merged Scheme and ERIS are capped. This is one of the most commonly misunderstood aspects of R&D claims and disproportionately affects startups with small payrolls.

The cap formula is:  £20,000 + (300% × company’s PAYE and NIC liabilities for the period)

Example

PAYE + NIC liabilities	£10,000
Cap calculation	£20,000 + (3 × £10,000) = £50,000
If your benefit is £60,000	HMRC pays £50,000 – £10,000 is lost (ERIS) or carried forward (Merged Scheme)

PAYE/NIC Cap-Key Differences by Scheme

• Merged Scheme: If your claim exceeds the cap, the excess is carried forward as an R&D Expenditure Credit to the next accounting period
• ERIS: Claims above the PAYE cap are disallowed and cannot be carried forward — so checking this early is essential

Exemptions to the Cap

• Companies creating, preparing to create, or significantly managing intellectual property (IP) in the UK may be exempt
• Where spending on connected subcontractors or EPWs makes up 15% or less of qualifying R&D costs, the cap may not apply
• Directors’ PAYE and NIC liabilities count toward the cap calculation- important for director-only companies

Step-by-Step Guide to Claiming R&D Tax Credits in 2026

Step 1: Assess Which Scheme Applies

• ERIS: Loss-making SME + R&D expenditure ≥ 30% of total company expenditure + fewer than 500 employees + turnover ≤ €100m or assets ≤ €86m
• Merged Scheme: All other companies with qualifying R&D activity

To calculate R&D intensity: (Qualifying R&D expenditure ÷ Total company expenditure) × 100. Include connected companies’ expenditure in both figures.

Step 2: Identify Qualifying Projects

For each project, document the following, HMRC expects this level of detail:

• The scientific or technological uncertainty you were trying to resolve
• The specific advance sought and why it goes beyond existing knowledge
• Why standard solutions could not solve the problem
• The methods, experiments, and iterations used
• What failed and why, negative results are fine and support your claim
• Who was involved and what their technical qualifications are

Step 3: Calculate Qualifying Expenditure

Track costs systematically by category throughout the year:

• Staff costs (salary + NICs + pension, apportioned for R&D time)
• Subcontractor payments × 65% (UK-based, unconnected)
• Software, cloud and data licence costs (apportioned if mixed use)
• Consumables and materials used in R&D
• EPW costs × 65% (unconnected, UK-based)

Maintain timesheets or other records to support your apportionment of staff time between R&D and non-R&D activities.

Step 4: Prepare Mandatory Documentation

Additional Information Form (AIF)-Required Before CT600

The AIF must be submitted before or at the same time as your CT600. Submitting your CT600 first results in automatic rejection of the claim. The AIF must include:

• Company UTR and employer PAYE reference
• Accounting period dates
• Breakdown of qualifying costs by category
• Project descriptions, minimum 5 lines each, explaining the technical uncertainty and advance sought
• ERIS intensity calculation (if claiming under ERIS)
• Name and contact details of the responsible officer or director signing off the claim
• Details of any agent or R&D consultant who has advised on the claim

Step 5: Claim Notification (If Required)

You must notify HMRC within 6 months of your accounting period end if:

• This is your first ever R&D claim
• You have not made a valid R&D claim in the last 3 consecutive accounting periods

If you claimed last year and have been claiming continuously, no notification is needed. But if you missed a year, check carefully, the notification deadline is firm.

Step 6: Submit the Claim

• Submit the AIF via HMRC’s online portal
• File your CT600 (company tax return) digitally, paper submissions are not accepted
• Keep all R&D documentation for a minimum of 6 years

Processing times: 4–6 weeks for straightforward, established claims. 8–12+ weeks for first-time claimants or complex claims.

HMRC Advance Assurance Pilot for SMEs

Following the Autumn Budget 2025, HMRC has launched a targeted Advance Assurance Pilot specifically for SMEs. This allows smaller businesses to get clarity on key aspects of their R&D relief claims before submitting them to HMRC.

What SMEs Can Seek Assurance On

During the pilot, SMEs can apply for advance assurance on one of four specific issues:

• R&D definition: Whether your project meets HMRC’s definition of R&D for tax purposes
• Overseas expenditure: Whether specific overseas costs qualify for relief under the geographic/legal necessity exemption
• Contracted-out R&D: Which party in your supply chain can legitimately claim relief for contracted-out R&D
• PAYE/NIC cap exemption: Whether your company qualifies for exemption from the payable credit cap

Who Is Eligible for the Pilot?

• Small and medium-sized enterprises (fewer than 500 employees, turnover ≤ €100m)
• The pilot focuses on first-time claimants and those with genuine uncertainty about compliance
• HMRC will specify which aspects of the claim they review, it is a targeted assurance, not a full claim review

Should You Wait for Advance Assurance Before Claiming?

No. Do not delay your R&D claim waiting for advance assurance if your work is clearly qualifying. If you have genuine uncertainty about a specific aspect of eligibility, particularly overseas costs, contracted-out R&D arrangements, or PAYE cap exemption, the pilot may be valuable. But delaying a valid claim costs you money.

The existing advance assurance scheme (for first-time SME claimants with turnover below £2m and under 50 employees) continues to run alongside the new pilot.

Nov 2025: Intra-Group RDEC Payment Rules Clarified

Legislation in Finance Bill 2025-26, effective from 26 November 2025, has clarified the Corporation Tax treatment of intra-group payments made in exchange for surrendered RDEC (R&D Expenditure Credit).

Under these rules, where one group company surrenders its RDEC to another:

• The payment received by the surrendering company is NOT taxable income (provided it does not exceed the amount of credit surrendered)
• The payment made by the receiving company is NOT a deductible expense
• The payment is NOT treated as a distribution for tax purposes

This provides much-needed certainty for group structures and eliminates the double-counting risk that previously caused confusion for finance teams managing intra-group R&D arrangements.

Special Considerations for Startups in 2026

Startups and early-stage companies often benefit most from the UK’s R&D tax credit system. Here is what you need to know:

• ERIS offers ≈27% cash benefit, one of the most generous government cash reliefs available to UK startups
• Losses can be surrendered for a payable cash credit, you do not need to be profitable or even generating revenue
• You can claim on expenditure going back up to 2 years from your current accounting period
• Pre-revenue startups can still claim – the scheme is designed to support innovation, not just established businesses

Startup Example: AI SaaS Company

Qualifying R&D spend	£200,000
Scheme	ERIS (loss-making, 30%+ intensity)
Effective cash benefit	≈£54,000
PAYE/NIC cap to check	£20,000 + (3 × PAYE/NIC liabilities)

Merged Scheme Example: Profitable Tech Company

Qualifying R&D spend	£100,000
Credit (20%)	£20,000
After 25% CT	£15,000 net benefit

Combining R&D Credits with Other Funding

Patent Box

• 10% Corporation Tax on profits attributable to patented IP
• Can be used alongside R&D relief, they are complementary, not mutually exclusive
• Patent Box is most valuable once you have a commercialised product generating profits
• It is worth planning both strategies simultaneously if you are developing IP

Grant Funding (Innovate UK, Horizon etc.)

• Notified state aid grants: May affect the scheme you use, discuss with a specialist before accepting
• Non-state-aid grants: Do not restrict your ability to claim ERIS or the Merged Scheme on the same expenditure
• De minimis aid: Counts toward cumulative state aid totals, keep records
• Innovate UK Loans are not grants and do not restrict R&D relief

2026 NOTE: The Autumn Budget 2025 included £130m through the Innovate UK Growth Catalyst and £500m through the UKRI Missions Accelerator. If you receive funding from these programmes, verify the grant terms before filing your R&D claim.

Common Mistakes to Avoid in 2026

Technical Documentation Mistakes

• Writing vague project descriptions with no technical detail, HMRC will reject or query these
• Failing to document the specific technical uncertainty, not just the business challenge
• No evidence of testing, iteration or failed attempts

Cost Calculation Mistakes

• Claiming overseas subcontractors without documented evidence of geographic or legal necessity
• Miscalculating R&D intensity when assessing ERIS eligibilit, forgetting to include connected companies
• Forgetting cloud computing, data licence, and AI/ML dataset costs
• Incorrectly classifying workers as subcontractors vs EPWs, these have different rules
• Including capital expenditure as qualifying costs
• Not pro-rating costs correctly for short accounting periods

Submission and Compliance Mistakes

• Submitting CT600 before the AIF-this results in automatic rejection of the claim
• Missing the 6-month claim notification deadline for first-time or lapsed claimants
• Not keeping supporting records for 6 years
• Signing off claims without a director’s review- HMRC expects director accountability
• Failing to apply the new intra-group RDEC rules correctly for group structures (in force from 26 November 2025).

2026 Compliance: HMRC’s Increasing Scrutiny

HMRC has significantly increased R&D enforcement activity. In 2026, companies face a higher probability of enquiry than at any point in the past decade.

What HMRC Is Targeting

• Claims with vague, generic or templated project descriptions
• Claims where costs appear disproportionate to the documented R&D scope
• Overseas costs claimed without evidence of necessity
• Incorrect contracting arrangements, particularly where subcontractors claim for work commissioned by them
• Director-signed claims where the director cannot explain the technical content
• Use of R&D advisers who charge contingency fees with no technical review

Records You Must Maintain

• Technical documentation: project logs, design documents, test records, failure reports
• Staff time logs with R&D and non-R&D activities separately identified
• Project timelines and milestone records
• R&D cost codes and accounting ledgers
• Emails, meeting notes, or technical discussions that evidence the uncertainty being explored
• Invoices and contracts with subcontractors and EPWs

Digital-First HMRC Process

• All claims must be submitted digitally via the HMRC online portal, no paper claims
• Pre-populated forms are available for recurring claimants
• Real-time validation checks flag common errors before submission
• Claims integrate with Making Tax Digital (MTD) digital tax accounts

Maximising Your 2026 R&D Claim

Best Practices

• Track R&D intensity monthly, this is especially important if you are near the 30% ERIS threshold
• Use UK-based subcontractors where possible, overseas costs are largely disallowed
• Maintain real-time project notes, do not reconstruct records at year-end
• Implement R&D cost codes in your accounting software from day one
• Review your claim quarterly, do not wait until after year-end to assess scope
• Brief your director, they will be accountable for the claim
• Consider applying to the new HMRC Advance Assurance Pilot if you have genuine uncertainty about overseas costs, contracted-out arrangements, or PAYE cap exemption eligibility.

When to Use a Specialist

Consider working with a qualified R&D tax specialist if your business:

• Is making its first R&D claim
• Has complex group structures or connected company arrangements
• Received Innovate UK, Horizon Europe, or other grant funding alongside R&D
• Has a claim value exceeding £50,000
• Has been contacted by HMRC regarding a previous claim
• Uses overseas subcontractors and needs to establish necessity
• Has intra-group RDEC surrender arrangements that need to be assessed under the new November 2025 rules.

When choosing a specialist, look for qualified chartered accountants or tax advisers, not just R&D consultancies charging contingency fees without robust technical review. HMRC holds directors accountable, not the adviser.

2026 Action Checklist

1. Confirm your accounting period start date to establish which scheme applies
2. Calculate your R&D intensity ratio to check ERIS eligibility (including connected companies)
3. Gather technical project documentation and identify qualifying costs
4. Check the PAYE/NIC cap and whether your payable credit might be restricted or lost
5. Submit claim notification to HMRC within 6 months of year-end (if required)
6. Consider the HMRC Advance Assurance Pilot if you have specific uncertainty about eligibility
7. Review any intra-group RDEC arrangements under the Finance Bill 2025-26 rules (in force from 26 November 2025)
8. Prepare and submit the AIF (Additional Information Form) before filing CT600
9. File CT600 digitally via HMRC portal
10. Retain all R&D records for a minimum of 6 years

FAQ

Can I still claim under the old SME scheme?

No. The SME scheme closed for accounting periods starting on or after 1 April 2024. If your period started before that date, the old rules still apply, check your accounting period carefully.

What is the minimum R&D spend to qualify for ERIS?

There is no minimum pound amount. You must meet the 30% R&D intensity threshold, meaning at least 30% of your total company expenditure (including connected companies) must be qualifying R&D spend.

Can failed projects qualify for R&D tax credits?

Yes. Success is irrelevant. What matters is that you were attempting to resolve a genuine scientific or technological uncertainty. Document your failures, they support your claim.

How do I calculate R&D intensity for ERIS?

Divide your qualifying R&D expenditure by your total company expenditure and multiply by 100. Importantly, you must include the expenditure of any connected companies in both the numerator and denominator.

How long will it take to receive the R&D credit?

HMRC typically processes established claims within 4–6 weeks of submission. First-time claimants or complex claims may take 8–12 weeks or longer, particularly given HMRC’s increased scrutiny in 2026.

What is the new HMRC Advance Assurance Pilot?

HMRC has launched a targeted pilot that allows SMEs to get clarity on specific aspects of their R&D claim before submitting. SMEs can seek assurance on: whether their project meets the R&D definition, whether overseas costs qualify, which party in a supply chain can claim, and whether they are exempt from the PAYE/NIC cap. This does not replace the existing advance assurance scheme for first-time SME claimants.

What changed for intra-group RDEC payments in 2026?

Legislation in Finance Bill 2025-26 confirms that intra-group payments made in return for surrendered RDEC are not treated as taxable income for the surrendering company, not deductible for the receiving company, and not a distribution. This removes previous ambiguity for group structures.

What if I claimed last year under the Merged Scheme?

You continue under the same scheme automatically. No action needed unless your circumstances have changed, for example, if you are now loss-making and R&D-intensive (potentially ERIS-eligible), or if your intensity has dropped below 30% (potentially losing ERIS eligibility, though the grace period may apply).

Can I claim R&D credits if I also received an Innovate UK grant?

It depends on the type of grant. Non-state-aid grants do not restrict your ability to claim ERIS or the Merged Scheme on the same expenditure. Notified state aid grants may affect your eligibility, discuss with a specialist before claiming.

What records do I need to keep?

HMRC expects you to retain all technical and financial documentation for at least 6 years. This includes project documentation, staff timesheets, invoices, contracts, correspondence evidencing technical uncertainty, and R&D cost ledgers.