Guide
The above the line R&D expenditure credit explained
What the above the line R&D expenditure credit means, how it is shown in the accounts, how the merged scheme credit is taxed and paid, and how RDEC began.
An "above the line" R&D credit is a credit worked out as a percentage of your qualifying R&D costs and treated as a receipt of the trade, rather than as an extra deduction in the tax computation. The merged scheme, which applies to accounting periods beginning on or after 1 April 2024, uses this model with a 20% credit. Because the credit is taxable, it is reduced by notional tax, then used against your tax liabilities in a set order, and only any balance is paid to you.
What "above the line" means
In a company's results, the line is the point between operating profit and the tax charge. Something "above the line" is part of the trading result. Something "below the line" is a tax item.
Under the old SME scheme, relief was an extra deduction when calculating taxable profit. It reduced the tax charge, but did not appear in the operating result. An expenditure credit is different. It is calculated on the cost, belongs to the trade, and is taxed as trading income. That is the sense in which the credit sits "above the line".
How a company presents the credit in its published accounts is for its accountant to decide under the accounting framework it uses. For tax, the point that matters is that the legislation treats the credit as a taxable receipt of the trade (Corporation Tax Act 2009, section 1042H).
A short history of RDEC
The research and development expenditure credit, RDEC, was introduced in April 2013 for large companies, at 10% of qualifying expenditure. Companies could choose it or the Large Company scheme until 31 March 2016, after which the Large Company scheme was discontinued. The rate then rose in steps: 11% in April 2015, 12% in January 2018, 13% in April 2020, and 20% for expenditure from 1 April 2023.
SMEs used a separate deduction scheme until the reforms. For accounting periods beginning on or after 1 April 2024, the SME scheme and the old RDEC were replaced by the merged scheme and by ERIS for loss-making, R&D-intensive SMEs. Our history of R&D tax relief has each change with its source.
Why the credit is taxed
Because the credit is a taxable receipt, a company would in theory pay tax on it in its Corporation Tax computation. The legislation allows for this through a notional tax deduction instead, so you do not compute a separate charge.
- If the company has profits chargeable at the main rate, ignoring the credit, notional tax is at 25%.
- Otherwise it is at the small profits rate of 19%.
A company in the marginal relief band still has profits chargeable at the main rate, so it uses 25%.
The steps: how the credit is used and paid
Section 1042I sets out what happens to the credit. Our merged scheme page covers each step. In outline:
- Same-period Corporation Tax. The credit is first set against the company's Corporation Tax for the accounting period.
- Notional tax. Notional tax is deducted from what remains.
- PAYE and NIC cap. The amount that can be paid out is limited to £20,000 plus 300% of relevant PAYE and NIC liabilities, unless the company is exempt. Any excess is carried forward to the next period. See the PAYE cap.
- Corporation Tax of other periods. What is left can be set against Corporation Tax for other periods.
- Optional group surrender. The company may surrender the balance to another group company.
- Other HMRC debts. The credit can be applied to other amounts owed to HMRC.
- Payment. Whatever remains is paid to the company.
Worked example: a profitable company
A company pays Corporation Tax at the main rate. It has £100,000 of qualifying costs and would owe £60,000 of Corporation Tax without a claim.
- Credit at 20%: £20,000
- Notional tax at 25%: £5,000
- Net benefit: £15,000, which first reduces the Corporation Tax bill
By our simplified arithmetic from the published rates, the bill falls to about £45,000 and no cash is paid, because the benefit is absorbed by the company's own tax. The cap and the later steps do not come into play.
Worked example: a loss-making company
A company with no Corporation Tax liability has £100,000 of qualifying costs.
- Credit at 20%: £20,000
- Notional tax at 19%: £3,800
- Amount available: £16,200
If the company's relevant PAYE and NIC liabilities were £10,000, the cap is £50,000, so the full £16,200 is available. After any other HMRC debts, it is paid to the company. With fewer payroll liabilities the cap could bite, and under the merged scheme the excess is carried forward. These examples ignore group surrender and other debts. Try your own figures in the benefit calculator.
Group companies
In a group, the credit belongs to the company that incurred the qualifying expenditure, but step five lets that company surrender what is left to another group company. Group companies often agree a payment for the surrender. For payments made on or after 26 November 2025, Finance Act 2026 section 31 provides that such payments, up to the amount surrendered, are ignored for Corporation Tax and are not distributions. The date of payment therefore matters, and the arrangement should be agreed before money moves. See our page on groups and connected companies.
Does the scheme choice matter for the cash?
For a loss-making SME with R&D intensity of at least 30%, ERIS may pay more than the merged scheme, because its payable credit is not taxable. But ERIS requires you to surrender loss. We model both routes before recommending one. The current rates are on our rates and thresholds page.
Talk to us
If you want to know how the credit would work for your company, book a call. Send us your accounting period, your qualifying costs and your Corporation Tax position, and we will walk through the steps with you and your accountant. Every claim we prepare is reviewed and signed off by a Chartered Tax Adviser.
This article is general information, not advice. Please speak to us before acting.
