R&D tax relief is a government incentive that rewards companies who invest in innovative projects in a field of science or technology. But the amount that companies can claim is subject to a PAYE NIC cap.
Essentially, for any one year, the PAYE NIC cap limits the amount of payable R&D Tax Credit to £20,000 plus three times your company’s total National Insurance Contributions (NICs) and Pay as you Earn (PAYE) liabilities (although the cap’s rules are different for businesses claiming RDEC – please see below for more information).
In its current form, HMRC introduced the PAYE NIC cap for accounting periods starting on or after 1 April 2021 as a way of targeting abuse and fraud. Today, the cap applies to all R&D Tax Credits schemes, including the new merged R&D scheme and the enhanced R&D intensive support scheme (ERIS).
In this article, we explain how the R&D PAYE NIC cap works, including how it applies to all of the different R&D Tax Credits schemes.
How the R&D PAYE NIC cap applies to the different schemes
For accounting periods starting before 1 April 2024:
R&D SME scheme
The cap for R&D SME scheme claimants is £20,000 plus 300% of your company’s total PAYE and NIC contributions.
RDEC
For the Research and Development Expenditure Credit (RDEC), the cap is purely based on the PAYE and NIC of the employees directly working on your R&D projects (i.e., not your company’s total PAYE and NIC liabilities).
For accounting periods starting from 1 April 2024:
Merged R&D scheme
The merged R&D scheme adopts the broader PAYE and NIC cap calculation used for the old SME scheme (£20,000 plus 300% of your company’s total PAYE and NIC contributions).
One new benefit of the merged R&D scheme is that if your calculated benefit exceeds the cap, the excess amount isn’t lost. Instead, it can be carried forward to become part of your R&D relief claim for the following accounting period.
ERIS
As with the old SME scheme, the cap for ERIS is £20,000 plus 300% of total PAYE and NIC contributions.
Unlike the new merged R&D scheme, if your claim goes over the cap then unfortunately, you’re not able to claim for the extra amount in the following accounting period.
Working out PAYE & NIC liabilities
Your total PAYE and NIC liabilities include:
- income tax due under PAYE regulations
- class 1 national insurance contributions
You can remove deductions made for:
- statutory maternity/paternity/adoption/pay
- statutory parental/shared parental pay
- bereavement pay
- child tax credit
- working tax credit
You can also include some outsourced PAYE and NIC staffing costs incurred by a connected company for subcontracted work or for R&D activities completed by connected externally provided workers (EPWs). If EPWs have only spent some of their time on R&D activities, you must include the relevant proportion of their PAYE and NIC liabilities.
You cannot include PAYE and NIC liabilities for subcontracted work or externally provided workers from an unconnected company.
R&D PAYE NIC example calculation
If your company is due to pay £100,000 in PAYE and NIC contributions the cap on your R&D relief would be £320,000 (£20,000 + [3* £100,000]).
If your accounting period is shorter than a year, that £20,000 gets reduced proportionally. So, if you were claiming for six months, the fixed amount would be £10,000.
R&D PAYE NIC cap exemptions
The PAYE NIC limit doesn’t apply to everyone. Your company will be exempt if for the accounting period you’re claiming for:
- you are in the process of creating, preparing to create, or managing Intellectual Property (IP)
- you spend no more than 15% of qualifying R&D expenditure on subcontracted work provided by connected companies or externally provided workers (EPWs) from connected companies
Both conditions must be met for your company to be exempt from the PAYE NIC cap.
How Leyton can help
Have a question about the R&D PAYE NIC cap? We’d be happy to assist.
Our team of tax specialists and industry experts can help your business to make the most out of the R&D relief schemes. They’re dedicated to keeping on top of the latest legislation changes, and can guide you through how the current rules apply to your business.
Book a meeting now.
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