How to Calculate R&D Tax Credit in 2025 - A Step-By-Step Guide

Below we explain how to calculate your R&D tax credit under the new rules – covering both profitable and loss-making companies – with examples, a brief recap of what qualifies as R&D, and practical tips for preparing a robust claim.

Not sure if your project qualifies? Speak to one of our R&D tax credit experts: we help SMEs identify eligible R&D activity and maximise their claims.

Understanding the new merged R&D scheme (from April 2024)

One unified approach for all businesses

The merged R&D tax credit scheme replaces the previous two-track system – which included the SME scheme and the Research and Development Expenditure Credit (RDEC) scheme – with a single, unified approach. Under the new rules, all companies can now claim a taxable R&D credit equal to 20% of their qualifying R&D expenditure.

A taxable credit, not a full 20% benefit

This credit is often referred to as an “above the line” credit because it appears as taxable income in your accounts, in the same way the old RDEC did. However, since the credit is taxable, companies don’t retain the full 20%. After corporation tax is applied, the effective net benefit typically falls between 15% and 16.2% of your R&D spend.

This represents a change from the previous SME scheme, which could offer significantly higher benefits – in some cases, up to around 33% for loss-making companies. As a result, many smaller businesses will receive a lower level of support under the merged regime.

A welcome simplification: no penalty for subsidised R&D

There are simplifications, though. One important update is that SME restrictions on subsidised R&D have been removed. This means that grant-funded or subsidised projects no longer need to be processed under a less generous scheme – a welcome change for innovative companies working with external funding.

New restrictions on overseas costs

However, the government has also tightened the rules on overseas R&D costs. In most cases, spending on subcontractors or externally provided workers based outside the UK will no longer qualify. Exceptions can be made, but only if companies can prove that the work had to be done overseas – for instance, due to regulatory, geographical, or environmental conditions.

A scheme designed to encourage UK innovation

These changes reflect the government’s intention to encourage more R&D activity within the UK, while also simplifying the system and reducing the scope for abuse. The aim is to make the scheme more consistent and focused on genuine innovation.

READ: Introduction To The Merged R&D Tax Relief Scheme

What qualifies as R&D under the new regime?

The definition of R&D for tax purposes remains the same under the new scheme. To qualify, a project must be seeking an advance in science or technology and must involve overcoming scientific or technological uncertainty.

What this means in practice

In practical terms, this means your work should aim to make a genuine improvement or breakthrough in your field – not just routine product development. There should be technical challenges that aren’t straightforward to solve. Qualifying R&D can occur in any industry, from software development and engineering to biotech or manufacturing, as long as the project meets HMRC’s criteria. For example, developing a new software algorithm that pushes technological boundaries could qualify, but creating a basic website would not.

Typical qualifying costs

Qualifying R&D costs typically include:

• Staff salaries for employees directly engaged in R&D, plus a proportion of pension and National Insurance contributions
• Consumable materials and equipment used up in the R&D process
• Software licence costs that are directly related to R&D
• Payments to subcontractors or external consultants for R&D work (subject to some restrictions)
• Costs of externally provided workers, such as agency staff working on R&D projects

Overseas costs and exclusions

From April 2024, costs related to overseas subcontractors or externally provided workers are only claimable if strict conditions are met – for example, if the work had to be carried out overseas for regulatory, geographical or environmental reasons.

Certain costs are explicitly excluded from R&D claims. These include overheads such as rent and utilities, and any production or distribution costs incurred after the R&D phase is complete.

Further guidance

For more detailed guidance on qualifying R&D criteria and costs, refer to HMRC’s official documentation or speak to a tax specialist. The most important thing is to ensure you have at least one eligible R&D project and that you can provide robust evidence that it meets the criteria.

READ: The Ultimate Guide to R&D Tax Credits for UK Businesses in 2025

Calculating the R&D tax credit under the merged scheme

Under the merged scheme, the calculation of your R&D tax credit is a two-part process: first, determine the credit amount, which is 20% of your qualifying costs. Then, work out the net benefit to your company, which depends on whether you can use the credit to reduce your corporation tax bill or if you’ll be claiming it as a payable cash refund. The scheme uses a taxable credit mechanism similar to the one used under the old RDEC system, with a series of steps to apply the credit.

In simple terms, profit-making companies will typically use the credit to reduce their corporation tax liability and may receive any excess as a cash payment. Loss-making companies, on the other hand, will usually receive the credit as a cash payment after a notional tax adjustment has been applied.

Let’s break down the calculation for each scenario.

Profit-making companies

If your company is profit-making, you will have a corporation tax liability – the R&D credit will primarily offset that tax. Here’s how to calculate the benefit:

Step 1

Calculate 20% of your qualifying R&D spend. This is your gross R&D credit. For example, if you had £100,000 of qualifying R&D costs, your gross credit is £20,000.

Step 2 

Apply the corporation tax to the credit. The £20,000 credit is taxable income, so effectively the government gives you £20k but immediately taxes it. If your profits are taxed at the main 25% rate, 25% of £20,000 (£5,000) goes back in tax, leaving a net benefit of £15,000. This net amount (15% of your R&D spend) is the actual saving you get​. Companies taxed at the small profits rate (19%) would keep £16,200 net (since 19% of 20k is taken in tax) – an effective 16.2% benefit​.

Step 3 

Use the credit to reduce your tax bill. In practice, the £20k credit first reduces your corporation tax bill for the year. If your corporation tax before R&D was, say, £50k, the £20k credit would knock it down to £30k. However, remember the credit itself increased your taxable profit by £20k (since it’s taxable income), which adds £5k tax – effectively, after all is said and done, your tax is £35k, which is £15k lower than it would have been without the R&D claim. The result is the same £15k net saving (this matches the calculation above, just viewed through the tax bill)​.

Step 4

Claim any excess as a refund (if applicable). If your R&D credit exceeds your tax liability, you don’t lose it – after the credit wipes out your tax due, any remaining credit can be paid out to you in cash (subject to some conditions like the PAYE cap, discussed later). For many profitable SMEs, the credit will just fully offset part of their tax. 

But if, for example, your tax bill was only £10k and you have a £20k credit, you’d use £10k of the credit to eliminate the tax and then still be entitled to a £10k (gross) refund. HMRC would then deduct the tax on that £10k (25% of 10k = £2.5k) and pay you £7.5k net. 

In total you’d get £10k off your tax and £7.5k cash, again £17.5k net (which is 17.5% of your R&D spend, aligning with the scenario of partly small profits rate usage). The exact net benefit can vary if your profit is low enough to be taxed at 19% or if part of the credit becomes a refund, but it will not exceed ~16.2% of your R&D spend.​

Try our SME R&D Tax Relief Calculator to see how much you could claim.

Profitable company example

Let’s say Company A had £100,000 of qualifying R&D costs in the year and is profitable, paying the 25% corporation tax rate. Its R&D credit is £100k × 20% = £20,000. This £20k is added to Company A’s taxable income, and at 25% tax that incurs £5,000 tax. After using the credit against its tax bill, Company A ends up £15,000 better off (it either pays £15k less in net corporation tax, or gets some of it as a refund). £15k represents 15% of the R&D spend, which is the effective relief received​. If Company A were only paying 19% tax (small profits), the net benefit would be £16,200 (16.2%).

Loss-making companies

If your company is loss-making (or has very little taxable profit), you won’t owe corporation tax for the year – so instead of offsetting tax, the R&D credit will be received largely or entirely as a payable cash credit from HMRC. The merged scheme uses a notional tax deduction in this case to mirror the effect of taxing the credit:

Step 1

Calculate 20% of qualifying R&D costs – same as above, this is your gross credit. Example: £100k R&D spend → £20,000 gross credit.

Step 2

Apply a 19% notional tax. For loss-makers, HMRC applies a 19% rate (the small profits corporation tax rate) to the credit​. Essentially, they assume you would have paid 19% tax on the credit if you had profits. So 19% of £20,000 = £3,800 is deducted. This leaves a net payable credit of £16,200. In other words, a loss-making company can get 16.2% of its R&D costs back in cash​. 

The use of 19% for all loss-makers is a new generous tweak – even a large company with no profits gets 81% of the credit, whereas under old RDEC rules a large loss-maker would have effectively kept only 75%.

Step 3

Check the PAYE/NIC cap. The payable credit is subject to the PAYE & NIC cap that HMRC introduced to prevent abuse by companies with no UK employees. Under this cap, the maximum cash credit you can claim is £20,000 + 300% of your total PAYE and NIC bill for R&D staff in the period​. 

In practice, if you have even one or two technical employees, your PAYE/NIC cap is usually high enough that it won’t limit a typical claim. In our example, suppose Company B had £30,000 of R&D-related PAYE/NIC for the year – the cap would be £20k + 3×£30k = £110,000, well above the £16.2k credit, so no issue​.

If a company has very little staffing in the UK, the cap might limit the immediate payout (any excess credit would be carried forward to use in future years).

Step 4

Receive the cash credit (after offsets). Since a loss-making company has no corporation tax to pay for the year, the credit isn’t used to offset current tax (step 1 of the RDEC process is skipped for this scenario). Instead, after the notional tax reduction and cap check, the remaining credit is first used to clear any other outstanding tax liabilities the company might have. For example, if you owe some late PAYE or VAT, HMRC will apply the credit to that)​.

After settling any such debts, the rest of the credit is paid out to the company as a cash refund. HMRC will only pay it out if they are satisfied the claim is valid (claims can be reviewed/audited) and the company is a going concern. Typically, a loss-making SME with a straightforward claim will receive the cash credit within a few weeks or months after filing.

Try our SME R&D Tax Relief Calculator to see how much you could claim.

Loss-making company example

Company B has £100,000 in qualifying R&D costs and made a loss in the year (no taxable profits). It can claim an R&D credit worth £20,000. Because Company B owes no corporation tax, HMRC will withhold a notional 19% (£3,800) – leaving £16,200 that the company can receive. Assuming Company B has met the PAYE cap requirement and has no other taxes due, HMRC would pay £16,200 in cash to Company B​.

This amounts to 16.2% of the R&D spend being reimbursed, providing a much-needed funding boost to help cover the R&D costs. 

Try our SME R&D Tax Relief Calculator to see how much you could claim.

Special case: R&D-intensive SMEs

The government has kept a separate, more generous relief for **small or medium companies that are R&D intensive. Generally those spending 40% or more of their total expenses on R&D, threshold lowering to 30% for periods after April 2024.

If an SME meets this criterion and is loss-making, it can claim under the enhanced R&D Intensive scheme (sometimes called ‘ERIS’). This scheme allows a higher payable credit by using a 14.5% credit rate on the loss surrendered (similar to the old SME rules)​

In effect, a loss-making R&D-intensive SME can get £26.97 back per £100 of R&D spend - approximately 26.97% benefit​ – much higher than the 16.2% under the merged scheme. This is designed to help startup companies heavily engaged in R&D. Important: A company cannot claim under both the intensive scheme and the merged scheme – it’s one or the other​.

READ: Startups and R&D Tax Credits: A Step-by-Step Guide

Profit-making R&D-intensive SMEs don’t get an extra rate (the special 14.5% credit mainly boosts cash refunds for loss-makers), but there is a one-year grace so that if a company just misses the threshold one year, it may still qualify​. For everyone else, the merged 20% scheme is the default. 

Effective R&D tax credit rates under the merged scheme vs the R&D-intensive scheme. Companies paying the main 25% corporation tax get an effective ~15% benefit, while loss-makers (or those taxed at 19%) get ~16.2%​. R&D-intensive loss-making SMEs can access a higher ~27% rate under a separate scheme. The merged scheme greatly reduced SME rates from prior levels but aims to streamline relief for most claimants.

Practical tips for compiling an R&D claim in 2025

Calculating the credit is only part of the process – to actually secure the R&D tax relief, you need to prepare and submit a compliant claim. Here are some practical tips and best practices for accountants, founders, and SME owners preparing claims under the new regime:

1. Identify qualifying R&D projects early and document them

Don’t wait until year-end to figure out what work qualifies. Throughout the year, track which projects or activities meet the R&D criteria (advance in science/tech with uncertainty). Engage a “competent professional” in your company – e.g. your lead developer or engineer – who can help document the R&D work and its uncertainties as you go​. Good record-keeping and technical notes will make writing the claim much easier and more robust.

2. Break down qualifying costs thoroughly

When compiling costs, categorise them by the HMRC-allowed cost categories: staff, externals, materials, software, etc. Allocate staff time carefully to R&D vs non-R&D work (you may need time sheets or estimates from managers). Similarly, apportion any mixed costs. Being thorough here ensures you claim everything you’re entitled to and can defend those figures if questioned​

3. Watch out for the new restrictions (e.g. overseas R&D)

Under the merged scheme, costs for overseas contractors or workers will not qualify unless you can convincingly pass HMRC’s three-step test demonstrating why the R&D couldn’t be done in the UK.​

If you do have significant foreign R&D spend, be prepared with evidence for those exemption conditions, or else exclude those costs to avoid issues. On the flipside, if you received a grant or subsidy for the R&D, note that you can still claim under the merged scheme (no more separation of subsidised projects) – a welcome simplification.

4. Prepare the Additional Information Form (AIF) and narrative

As of August 2023, HMRC requires an online AIF to be submitted for all R&D claims, detailing key aspects of the claim​

This includes a brief description of the R&D projects and a breakdown of costs. In practice, you should also prepare a more detailed technical narrative report to support your claim (the AIF is relatively short and not a full report). Make sure to submit the AIF alongside your CT600 company tax return – not doing so can invalidate your claim. The narrative should clearly explain how your projects meet the definition of R&D and address the guidelines (this helps preempt questions).

5. Meet the notification deadline if you’re a new claimant

A new rule from 2023 requires companies new to R&D relief (or returning after a 3+ year gap) to notify HMRC in advance that they plan to claim​. 

This notification must be done within 6 months of the end of the accounting period in which you want to claim. If you’re filing your first R&D claim for the year ending December 2024, for instance, you need to send HMRC a notification (via their online form) by 30 June 2025. Failing to do so means you cannot claim for that year, so don’t miss this if it applies to you.

6. Maximise the PAYE/NIC cap headroom (if applicable)

Most genuine companies won’t have an issue with the cap, but if you’re a small startup that outsources R&D heavily and has little payroll, be aware of the £20k + 3×PAYE cap.​

One way to maximize your claim is to ensure key R&D staff are on the payroll (rather than all on contractor invoices) so that your PAYE/NIC footprint grows. Also, if you are close to the cap, note that you can still carry forward any excess credit and potentially use it in future years when your PAYE grows – so track it.

• Consider if the R&D-intensive SME relief applies. If your R&D spend is, say, half of your total expenses and you’re running at a loss, you likely qualify for the higher 14.5% credit rate (ERIS)​.
• Be sure to tick the appropriate box/indicator on the claim forms to claim this enhanced credit. It can make a big difference (27% vs 16% cash back). There’s also a 30% intensity threshold from April 2024 with a one-year grace – meaning if you just drop below 30% one year, you might not be kicked out of the scheme immediately​
• Keep an eye on your R&D intensity and discuss with a tax advisor which scheme is best for your situation each year.

7. Double-check CT600 and CT600L entries.

The claim will be filed through your Company Tax Return. Ensure you fill in the CT600L supplementary form correctly – this is where you declare the R&D credit, how much is payable, how much to offset, etc. Mistakes in these forms can delay payment or trigger inquiries. It’s often useful to have a second pair of eyes (another accountant or an R&D tax specialist) review the completed forms and calculations before submission, especially under the new rules.

8. Plan your cash flow around the R&D claim

If you’re relying on the R&D tax credit (especially cash refunds) as part of your funding, remember that the credit only comes after year-end and after you file the return. For example, a claim for the year ending 31 March 2025 can only be submitted once the accounts are done – say in summer 2025 – and might not be paid out until autumn 2025. So budget accordingly. 

You can, however, file early if your accounts are ready, or even do an interim claim if you shorten a period – but talk to your accountant about the pros/cons of that. Also, note HMRC has been known to take longer to process some R&D claims due to compliance checks, so don’t bank on the cash arriving on a specific date.

9. Stay informed and seek expert help if needed

The R&D tax relief scheme has seen many changes recently, and further tweaks could still come. Make sure you stay updated on guidance (for instance, HMRC’s new Guidelines for Compliance were published in Oct 2023​). 

If you’re unsure about any aspect – whether a project is eligible, or how to handle the computation – why not get in touch? Our experts can help you ensure your claim is maximized and compliant. 

READ: Why Choose R&D Tax Credit Specialists Over DIY Claims

By following these practices, accountants and founders can confidently compile their R&D claims and take full advantage of the relief available. The UK’s R&D tax credit remains a valuable incentive to spur innovation – and under the 2025 rules, while the relief for SMEs is a bit leaner than before, it can still significantly reduce your company’s tax bill or provide a cash infusion to reinvest in development. Calculating the credit correctly and substantiating your claim with good documentation are crucial steps to ensure you get the benefit your R&D work entitles you to.​