Is R&D Tax Deductible? How the Relief Works Under the Merged Scheme

Yes — costs incurred on qualifying R&D are tax-deductible. Under UK corporation tax rules, a company can deduct 100% of its R&D expenditure from trading profits in the normal way. But R&D tax relief goes further: it also gives you a credit on top of that deduction, reducing your tax bill or generating a cash repayment from HMRC.

The form the relief takes has changed significantly since April 2024. The old SME R&D Tax Relief scheme — which enhanced expenditure by 130%, producing a total 230% deduction — no longer applies to accounting periods beginning on or after 1 April 2024. Most companies now claim under the merged RDEC scheme.

How the merged RDEC scheme works

Under the merged Research and Development Expenditure Credit (RDEC) scheme, qualifying R&D spend generates a 20% above-the-line credit. That credit is included in your accounts as income before tax, then taxed at your corporation tax rate. For a company paying 25% corporation tax, the net benefit works out at around 15p for every £1 of qualifying R&D expenditure — delivered either as a reduction in your tax bill or, for loss-making companies, as a cash repayment from HMRC.

This is separate from — and stacks on top of — the standard 100% revenue deduction for R&D costs. The credit itself is calculated on your qualifying spend and then offset against your corporation tax liability before any cash refund is issued.

ERIS: the enhanced rate for R&D-intensive companies

Loss-making companies whose qualifying R&D expenditure represents 30% or more of their total expenditure for the period may qualify for the Enhanced R&D Intensive Support (ERIS) scheme. ERIS applies an 86% uplift to qualifying costs and a 14.5% payable credit — worth up to 26.97p per £1 of qualifying R&D spend. This is a meaningful improvement over the standard merged scheme rate and is designed to support early-stage, R&D-intensive businesses that have no tax liability to offset against.

What R&D costs are tax-deductible?

Qualifying costs include:

• Staff costs — salary, employer National Insurance, and pension contributions for employees directly involved in R&D
• Subcontractors and externally provided workers (EPWs) — 65% of amounts paid to subcontractors or unconnected agencies under the merged scheme
• Consumable materials — materials used up or transformed during R&D activities
• Software and cloud computing — costs for software or cloud services used directly in qualifying R&D
• Data licences — payments for datasets used in qualifying R&D work

Capital expenditure on equipment does not qualify under the main R&D relief scheme, though it may qualify for separate R&D capital allowances. General overheads not directly attributable to R&D work are excluded. See our full RDEC cost categories guide for detail on each category.

How to claim

R&D claims are made through your Company Tax Return (CT600) and must be accompanied by an Additional Information Form (AIF) submitted to HMRC before or alongside your return — this has been mandatory since August 2023. If you are making a first-time claim, or your last claim was made more than three years ago, you must also submit a Claim Notification Form (CNF) within six months of the end of the accounting period.

Claims can be made up to two years after the end of the accounting period to which they relate.

Frequently Asked Questions

Is R&D expenditure deductible in addition to the tax credit?

Yes. The 100% revenue deduction for R&D costs still applies under the merged scheme. The RDEC credit is calculated on top of that and treated as above-the-line income in your accounts. The two interact through the corporation tax computation, producing a net benefit of around 15p per £1 of qualifying spend at the 25% CT rate.

Does the 130% enhancement still apply?

No. The 130% enhancement under the old SME R&D Tax Relief scheme — which produced a total 230% deduction — was abolished for accounting periods beginning on or after 1 April 2024. Companies that straddle that date may still have a transitional claim under the old rules, but going forward all companies claim under the merged RDEC framework (or ERIS if eligible).

What is the net benefit under the merged scheme?

For a profit-making company paying 25% corporation tax, the merged RDEC produces a net benefit of approximately 15p per £1 of qualifying R&D expenditure. Loss-making companies meeting the ERIS 30% intensity threshold can receive up to 26.97p per £1 as a cash repayment. Use our R&D tax credit calculator to estimate your position.

What if my company is loss-making?

Loss-making companies can still receive the merged RDEC credit as a cash payment from HMRC — it doesn't require a tax liability to offset against. If your R&D spend represents at least 30% of total expenditure, you may also qualify for the more generous ERIS rate. See our guide to ERIS for the eligibility rules.