Merged R&D Scheme vs ERIS: Which Applies to You?
For accounting periods beginning on or after 1 April 2024, most companies claim under the merged R&D expenditure credit scheme, which gives a 20% taxable credit. Loss-making SMEs whose relevant R&D spend is at least 30% of their total relevant expenditure can instead claim Enhanced R&D Intensive Support (ERIS), worth up to 26.97p per pound.
How does the merged scheme work?
The merged scheme gives a 20% above the line credit on qualifying R&D expenditure. The credit is taxable, so a company paying 25% Corporation Tax keeps 15p per pound, a company on the 19% small profits rate keeps 16.2p, and a loss-making company is treated as if taxed at a notional 19%, also keeping 16.2p. Companies in the marginal relief band see about 14.7p. The net credit is used against Corporation Tax and other liabilities first, then paid out, subject to the PAYE cap.
How does ERIS work?
ERIS gives an additional deduction of 86% of qualifying costs, so the total deduction is 186%. A loss-making company can surrender the resulting loss for a payable credit at 14.5%. If all of it is surrendered, the benefit is 186% × 14.5% = 26.97p per pound.
What is the 30% intensity test?
A company is R&D intensive if its relevant R&D expenditure is at least 30% of its total relevant expenditure for the period. Both figures include connected companies. Before April 2024 the threshold was 40%, so some companies that did not qualify under the old rules now do.
What is the one-year grace period?
If a company met the intensity condition in its previous accounting period, it can continue to claim ERIS for one period in which it falls below 30%. This smooths out years with unusually high non-R&D spending.
How do the schemes compare?
| Feature | Merged scheme | ERIS |
|---|---|---|
| Who | All companies, SME or large | Loss-making SMEs, R&D at least 30% of total spend |
| Mechanism | 20% taxable credit | 86% extra deduction, losses surrendered at 14.5% |
| Net benefit per £1 | 15p to 16.2p | Up to 26.97p |
| PAYE cap | £20,000 plus 300% of PAYE and NIC on the payable amount, with exemptions | Same cap applies |
| Grant-funded work | No longer restricted to a lower relief | No longer restricted to a lower relief |
| Overseas costs | Contracted-out work and EPWs generally UK only | Same |
Worked examples
Profitable SME, 25% tax, £300,000 qualifying spend. Merged scheme credit £60,000, taxed at 25%, net about £45,000.
Loss-making SME, R&D 20% of total spend, £300,000 qualifying spend. Below the ERIS threshold, so merged scheme: £60,000 credit less notional 19% tax, net about £48,600.
Loss-making SME, R&D 45% of total spend, £300,000 qualifying spend. ERIS: £300,000 × 186% × 14.5% = about £80,910, if the whole loss is surrendered and the PAYE cap does not bite.
What about periods before April 2024?
For periods beginning between 1 April 2023 and 31 March 2024, SMEs used the old SME scheme (86% extra deduction, 10% payable credit, or 14.5% for companies with R&D at least 40% of spend), and large companies used the old RDEC at 20%. These periods may still be open for a claim if you are within the two-year window and met any claim notification requirement.
Which should you choose?
You do not choose freely: the rules decide which applies. The real choice for ERIS companies is whether to surrender losses for cash now or carry them forward. Use our calculator for an estimate, then ask a specialist to model your actual figures.
Sources
How is the merged scheme credit actually paid out?
The merged scheme credit is not simply paid as cash. It goes through a fixed sequence of steps set out in legislation. In outline:
Credit calculated
20% of qualifying expenditure, included in taxable profit.
Set against Corporation Tax
The credit first discharges the Corporation Tax liability for the period.
Notional tax deducted
For loss-making companies a notional tax charge at 19% applies before payment.
PAYE cap applied
Any amount above the cap is carried forward, unless an exemption applies.
Other debts settled
The credit can be used against other HMRC liabilities and group companies.
Balance paid
Any remaining amount is paid to the company or surrendered within a group.
This sequence is why two companies with the same R&D spend can receive different cash amounts in a year.
How does the PAYE cap work?
The PAYE cap limits the payable part of the credit to £20,000 plus 300% of the company's PAYE and National Insurance liabilities for the period, with connected companies' liabilities included in some cases. There is an exemption where the company is creating or managing intellectual property and does not spend more than 15% of its qualifying expenditure on work subcontracted to, or workers provided by, connected persons. The cap mainly affects companies that rely heavily on contractors or overseas related parties. Amounts held back by the cap are carried forward, not lost.
How do grants affect each scheme?
Under the old SME scheme, a project funded by a grant or other subsidy often had to be claimed under the less generous RDEC. For accounting periods from April 2024, the merged scheme and ERIS no longer apply that subsidy restriction. Grant funded projects can still be claimed, but the grant must be handled correctly in the accounts and the claim, and some grant terms or state aid rules may limit what you can claim.
What about accounting periods that straddle 1 April 2024?
The merged scheme and ERIS apply to accounting periods beginning on or after 1 April 2024. If your period began before that date, the old rules apply to the whole period, even if most of it fell after April 2024. A company with a year starting 1 January 2024, for example, uses the old schemes for the year ending 31 December 2024 and the new ones from 1 January 2025.
Is the merged scheme better for profitable SMEs than the old SME scheme?
For most profitable SMEs, the old SME scheme gave a higher benefit than the merged scheme does now: about 21.5p per pound at 25% tax, compared with 15p under the merged scheme. The merged scheme is simpler, removes the subsidy restriction and treats contracted-out work more consistently, but it is generally less generous for profitable small companies. Loss-making R&D intensive SMEs are protected by ERIS at up to 26.97p.
Which scheme applies? A quick decision table
| Company | Loss-making? | R&D share of spend | Scheme |
|---|---|---|---|
| Large company | Either | Any | Merged scheme |
| SME | No | Any | Merged scheme |
| SME | Yes | Under 30%, no grace period | Merged scheme |
| SME | Yes | 30% or more | ERIS |
| SME | Yes | Under 30%, but qualified last period | ERIS (grace period) |
Is the government planning changes?
The government has said the 2024 reforms are clear in some places and complex in others. In its consultation published alongside the Autumn Budget on 28 October 2026, it asked for views on simplifying the ERIS intensity ratio and connected company rules, the PAYE cap exemption and the going concern requirement. It also announced that the claim notification requirement will be removed from April 2027 and the Additional Information Form simplified from autumn 2027. The rates themselves were not changed. Source: HM Treasury consultation, October 2026.
What should you do next?
- Check your accounting period start date to see which rules apply
- Work out roughly whether your R&D is 30% or more of total spending
- List connected companies and any grants
- Estimate the benefit with our calculator
- Ask a specialist to model the real figures, including the PAYE cap
Worked example with the PAYE cap
Illustration. A loss-making SME with R&D at 25% of total spending claims the merged scheme on £400,000 of qualifying expenditure. The gross credit is £80,000, and after notional tax at 19% the net amount is £64,800. Its PAYE and NIC liabilities for the year are £10,000, so the cap is £20,000 plus 300% of £10,000, which is £50,000. Unless the exemption applies, £50,000 can be paid now and the remaining £14,800 is carried forward.
This is why companies relying mainly on contractors, rather than employees, should check the cap before expecting a full cash payment.
How do large companies claim?
Large companies claim under the merged scheme in the same way as SMEs, at 20% of qualifying expenditure. They cannot claim ERIS. For large groups, the main issues are identifying R&D across many teams, apportioning shared costs, handling contracted-out work within the group and consistency across group companies' claims.
How do groups of companies claim?
Each company in a group makes its own claim for its own R&D. Connected companies matter in three places: the ERIS intensity test combines connected companies' figures, the PAYE cap can take connected companies' PAYE into account, and work contracted out or workers supplied within the group are treated differently from unconnected arrangements. Mapping the group at the start avoids mistakes later.
Can you claim for more than one period at once?
Yes, if each period is still within its two-year claim window and any claim notification was made in time. Different periods may fall under different schemes, so the specialist should prepare each period on its own rules.
How does the merged scheme treat contracted-out R&D?
Under the merged scheme, relief for contracted-out R&D generally goes to the company that decides to undertake the R&D and contracts it out, rather than the company that does the work. If a customer intended or contemplated R&D when it placed a contract with you, the customer is generally the one that claims. This replaced the old system in which SMEs and large companies were treated differently, and it is one of the main reasons to check contracts before claiming.
What is the going concern requirement?
A company must be a going concern to receive a payable credit. Broadly, its latest accounts must have been prepared on a going concern basis and it must not be in administration or liquidation. The government's October 2026 consultation noted concerns that companies can lose going concern status for technical reasons while still running a viable trade, but no change has been made.
Summary
Most companies now claim the merged scheme at 20%, worth 15p to 16.2p per pound after tax. Loss-making R&D intensive SMEs claim ERIS at up to 26.97p. The PAYE cap, connected companies and contracts affect both, so model your own figures before relying on headline rates.
Glossary
- AIF
- Additional Information Form, the online form HMRC requires before an R&D claim is made.
- Claim notification
- Advance notice to HMRC of an intended claim, required for first-time and returning claimants until its announced removal from April 2027.
- Merged scheme
- The R&D expenditure credit scheme for accounting periods from 1 April 2024, giving a 20% taxable credit.
- ERIS
- Enhanced R&D Intensive Support, for loss-making SMEs whose R&D is at least 30% of total relevant expenditure.
- PAYE cap
- The limit on payable credits of £20,000 plus 300% of PAYE and NIC liabilities, with an exemption for some companies.
- Period of account
- The period covered by the company accounts, which can be longer than an accounting period for tax.
- Competent professional
- A person with knowledge and experience of the field who can judge whether a problem is routine.
Frequently asked questions
Can a large company claim ERIS?
No. ERIS is only for SMEs.
Is the merged scheme credit taxable?
Yes. It is treated as taxable income, which is why the net benefit is lower than 20%.
Can an SME switch between schemes each year?
The scheme follows the facts each year. An SME can claim ERIS in one year and the merged scheme in another if its intensity or profit position changes.
Did the Autumn Budget 2026 change R&D rates?
No. The rates were not changed. The government announced process changes, including removing the claim notification requirement from April 2027, and opened a consultation on simplifying parts of the rules.
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