The R&D PAYE and NIC cap: why your cash may be less than you expect.

It is a limit on the amount of R&D credit that can be paid out in cash. Under section 1112B of the Corporation Tax Act 2009, the cap is £20,000 plus 300% of the company's relevant PAYE and NIC liabilities for the period. It stops a company with little payroll receiving a large payment, and it affects start-ups with few employees most.

Mainly the PAYE income tax and Class 1 National Insurance the company must account for on its payroll for the period (section 1112D). Under section 1112C, a connected company's PAYE and NIC can be added, but only the part attributable to externally provided workers it supplies, or to R&D it carries out for the claimant under contract. We confirm the figures from payroll records.

Yes. The £20,000 element is reduced pro rata where the accounting period is shorter than twelve months. The 300% element is based on the liabilities actually arising in the period, so it falls naturally with a shorter period. A newly formed company or one that has changed its year end should check the cap period by period.

A company is exempt if it meets two conditions in section 1112E. It must be creating, preparing to create or managing its own intellectual property, with that activity done wholly or mainly by its employees. And its connected-party externally provided worker and contractor costs must be no more than 15% of its qualifying expenditure.

The exemption is aimed at companies that develop or manage their own intellectual property rather than working purely on someone else's. Examples include software, designs and processes the company will own and exploit. The activity must be done wholly or mainly by the company's employees, so heavy outsourcing weakens the case. Evidence of IP strategy and ownership helps.

Costs of externally provided workers and contractors who are connected to the company are compared with the company's total qualifying expenditure. If the connected-party costs are no more than 15% of that total, the second condition for the exemption is met. A group that outsources R&D to a sister company can lose the exemption easily, so run the comparison early.

Under the merged scheme, any excess over the cap is carried forward and treated as credit of the next accounting period, so it is delayed rather than lost. ERIS works differently: HMRC's manual says a claim for tax credit above the cap is invalid, so there is no credit to carry forward. In practice the company surrenders only the loss the cap allows, and keeps the rest as a trading loss.

Usually not much. In the merged scheme the credit is first set against the Corporation Tax of the same period, then notional tax is deducted, and only then does the cap apply. A profitable company whose credit is absorbed by its own tax is not affected. The cap matters when there is a balance that would otherwise be paid out.

They can. The cap is based on PAYE and NIC liabilities. Dividends carry neither, so a company that pays its founders mainly in dividends has a smaller payroll base, and the cap is closer to the £20,000 minimum. Changing remuneration should never be done only for the cap, so take advice first.

Yes, unless the company is exempt. HMRC's guidance on working out your R&D tax relief says the ERIS payable credit is subject to the PAYE and NIC cap, so a loss-making company with a small payroll can receive much less than the headline rate of about £27 per £100 suggests. We model the cap in every ERIS calculation.

Keep records showing that the company owns or will own the IP being developed, that employees did most of the work, and that connected-party EPW and contractor costs are within the 15% limit. Board papers, IP registers, contracts and payroll analysis all help. Because the exemption can change the cash by a large amount, the evidence should be prepared with the claim.

Possibly, for SMEs. The PAYE cap exemption is one of the four areas covered by HMRC's targeted advance assurance pilot, launched on 18 May 2026. You can make up to two applications, and HMRC aims to decide within 40 calendar days. Large companies and those with an open Corporation Tax enquiry are excluded.

By our arithmetic: a company with £30,000 of relevant PAYE and NIC liabilities has a cap of £20,000 plus 300% × £30,000, or £110,000. A company with £5,000 has a cap of £35,000. Payable credit above those figures, if the company is not exempt, would be carried forward under the merged scheme. These are simple illustrations of the formula only.

The cap formula still gives £20,000 when there are no PAYE or NIC liabilities, so a payment up to that amount is possible if the other conditions are met. In practice, a company with no employees will find it hard to show that it carried out its own R&D. The claim would need careful support and may attract questions.

It could in principle, because it is set in legislation. The Corporate Tax Roadmap said the rates of the merged scheme and ERIS would be maintained, but we have not seen a published commitment on the cap itself. The Budget is due on 28 October 2026, and we review this page after each Budget.