The merged scheme: a 20% credit, taxed, then used in a set order.

It is the main R&D relief for accounting periods beginning on or after 1 April 2024. It replaced the old RDEC and SME schemes. The company receives a credit equal to 20% of its qualifying R&D expenditure. The credit is a taxable receipt of the trade and is applied in a set order against the company's tax liabilities before any balance is paid to it.

The legislation treats the credit as a taxable receipt of the trade. That is why the net benefit is lower than the headline 20%. The tax effect is built into the calculation through a notional tax deduction, so the company does not need to compute a separate tax charge on the credit. The calculator and rates page show the effect in numbers.

It is an amount taken off the credit to reflect the Corporation Tax the credit would attract. Under section 1042K, it is charged at the main rate, 25%, if the company has profits chargeable at the main rate ignoring the credit, and otherwise at the small profits rate, 19%. It is step two in the order of use.

Because the notional tax rate differs. By our arithmetic, a 20% credit less 25% notional tax leaves 15% of qualifying costs, and a 20% credit less 19% leaves 16.2%. The loss-making or small profits company pays notional tax at the lower rate, so it keeps more. These net figures are before the PAYE cap and other limits.

The first step in the order of use is to set the credit against the Corporation Tax of the same accounting period. After that, the notional tax deduction is taken, then the PAYE cap applies. So a profitable company will normally see its Corporation Tax bill fall first, and only a balance would be considered for payment.

Yes, but only after the earlier steps. Any balance after the Corporation Tax, notional tax and PAYE cap steps, and after any other period's tax, group surrender and other HMRC debts, is paid to the company. A loss-maker with little Corporation Tax therefore often has a balance, though the PAYE cap can limit it.

The excess over the cap is carried forward to the next accounting period, where it can be used again. The cap is £20,000 plus 300% of the company's relevant PAYE and NIC liabilities, unless the company is exempt. Our PAYE cap page explains the formula and the exemption for companies that create or manage their own IP.

Yes. Step five of the order of use is an optional group surrender, so the credit can be surrendered to another company in the group. Group companies often agree a payment for the surrender. Finance Act 2026 section 31 deals with how such payments are treated. It applies to payments made on or after 26 November 2025.

For payments on or after 26 November 2025, Finance Act 2026 section 31 provides that payments between group companies for surrendered expenditure credit, up to the amount surrendered, are ignored for Corporation Tax and are not distributions. Payments made earlier are outside that rule, so the date of payment matters. Take advice before agreeing a group payment.

It builds on it, but it is not the same. The old RDEC applied mainly to large companies and, for expenditure from 1 April 2023, paid 20%. The merged scheme applies the same 20% rate to companies of any size for periods beginning on or after 1 April 2024. SMEs lost the old SME deduction and now use the merged scheme or ERIS.

Yes. An SME that qualifies for ERIS may use the merged scheme instead, but not both for the same costs. Which is better depends on losses, the PAYE cap and the notional tax position. We model both. A loss-making SME with intensity of at least 30% often finds ERIS pays more, but that is not automatic.

HMRC's guidance gives different rates for ring-fenced trades. The standard 20% rate and the notional tax figures on this page apply to ordinary trades. If your company has a ring-fenced trade, tell us at the outset and we will check the rates that apply to it before any figure is quoted to you.

Step six of the order of use applies the credit to other amounts the company owes HMRC before the balance is paid. If you have an unpaid PAYE or VAT bill, for example, part of the credit may go towards it. A company with arrears should expect less cash than the headline calculation suggests.

Section 1042I sets seven steps: Corporation Tax of the same period, the notional tax deduction, the PAYE and NIC cap, Corporation Tax of other periods, optional group surrender, other HMRC debts, and finally payment of any balance. Each step only uses what the earlier ones leave, so the order can change the amount paid.

Yes. The merged scheme is the route for large companies as well as SMEs. The qualifying cost rules are the same for the merged scheme and ERIS, and the credit rate is 20% whatever the company size. Larger companies are more likely to be profit-making and to use the credit against Corporation Tax, rather than receiving cash.