PAYE & NIC Cap for R&D Tax Credits: How Does It Work?

The PAYE cap for R&D tax relief is designed to support businesses that drive genuine R&D activity in the UK.

For R&D tax relief, there is a PAYE and NIC cap that is designed to prevent fraudulent R&D claims from companies that are not engaged in genuine R&D activity in the UK. It applies to all R&D tax schemes, including the merged R&D scheme, ERIS, RDEC and SME.

In this article, we’ll look at how the PAYE cap works for R&D tax relief, and the exemptions that exist. We’ll also look at how it applies to different R&D schemes.

What is the PAYE Cap for R&D?

For accounting periods beginning on or after the 1st April 2021, the PAYE and NIC cap has been introduced to prevent fraudulent R&D claims from companies that are not engaged in genuine UK R&D activities. 

The goal of the PAYE cap is to stop companies with little or no employment in the UK from channelling funds through the country to access R&D tax relief. Essentially, it keeps the focus of the tax relief on supporting genuine innovation in the UK.

How the PAYE Cap works

The amount of R&D tax credits that are payable is capped at £20,000 plus 300% of the company’s relevant PAYE and NIC liabilities. This generous structure is designed to support genuine R&D activities without allowing for exploitation.

In the merged R&D and SME scheme, the cap limits the amount of credit payable within the accounting period in which it’s claimed. If your claim exceeds this cap, the surplus is carried forward and treated as an R&D expenditure credit in future periods. This means you can offset it against future corporation tax liabilities.

However, in the ERIS scheme, the cap does not allow excess amounts to be carried forward and claims above the PAYE cap are deemed invalid. 

It’s also important to note that the RDEC scheme operates under different rules regarding how PAYE/NIC liabilities impact credit amounts. Specifically, the RDEC scheme does not utilise the same ‘carry forward’ mechanism for excess credit as is present within the merged, SME and ERIS scheme. 

Exemptions to the PAYE Cap

Your company might be exempt from the PAYE cap if it meets both of the following two conditions:

1. It must be preparing to create, actively creating, or managing Intellectual Property (IP).
2. It spends no more than 15% of total R&D expenditure on connected externally provided workers or subcontractors.

PAYE Cap in Different Schemes

Accounting periods starting on or after 1 April 2024

Merged R&D Scheme:

• The cap limits the credit payable during the claim period.
• Excess credit can be carried forward, becoming an R&D expenditure credit in future periods.

ERIS (Enhanced R&D Intensive Support) Scheme:

• The cap does not allow excess amounts to be carried forward.
• Claims above the PAYE cap are deemed invalid.

Accounting periods before 1 April 2024

SME Scheme:

• The cap limits the credit payable during the claim period.
• Excess credit can be carried forward, becoming an R&D expenditure credit in future periods.

RDEC Scheme:

• While not a cap in the same way as the current rules, the amount of RDEC credit payable could be restricted based on a company’s PAYE and NIC liabilities.
• The RDEC scheme did not utilise the same ‘carry forward’ mechanism for excess credit as is present within the current merged and SME schemes.

The PAYE and NIC Cap are essential for ensuring that R&D tax relief is allocated properly and within the UK. Grasping the nuances of this cap and its exemptions is crucial for compliance with the scheme.

If you believe you might be impacted by the PAYE cap but are uncertain, please get in touch with one of our experts, who will be happy to assist you.