R&D Tax Relief in 2025: What Every Innovative Business Needs to Know Now

Innovation Tax Reliefs

The UK’s research and development (R&D) tax relief landscape underwent its most significant overhaul in years starting April 1, 2024. As we move deeper into 2025, innovative businesses of all sizes must understand the implications of the newly merged R&D tax relief scheme, which replaces the previous SME and RDEC schemes with a single, unified system.

What is the Merged R&D Tax Relief Scheme?

The merged scheme consolidates the UK’s former two-tier approach—one for small and medium-sized enterprises (SMEs) and another for larger companies—into a single scheme applicable to all qualifying companies. This simplifies the process but also introduces some important changes in rates, eligibility, and compliance rules.

Most notably, the merged scheme offers a 20% “above the line” credit on qualifying R&D expenditure. After corporation tax, this delivers an effective net benefit of around 15% for most companies, while appearing clearly in company accounts and benefiting both profit-making and loss-making companies. This improved transparency enhances the visibility of the benefit in business financial statements.

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Who Does It Affect?

All UK companies eligible for R&D tax relief with accounting periods starting on or after 1 April 2024 now fall under the merged scheme. By late 2025, most businesses are either already claiming under the new system or are about to do so for the first time, depending on their year-end:

March 31 year-end businesses have already completed their first merged scheme claim in their 2024/25 accounts, filed earlier this year.
December 31 year-end businesses are now preparing for their first claims under the merged system in their 2025 accounts, making Q4 2025 a crucial period to get records and compliance in order.
R&D-intensive SMEs (where R&D spend is at least 30% of total expenditure) may continue to benefit from the Enhanced R&D Intensive Support Scheme (ERIS), which provides an effective net benefit of up to 27%. A one-year grace period also protects businesses that temporarily fall below the threshold, preventing sudden losses of relief.

Key Changes Businesses Need to Know

Unified Tax Credit Rate: Unified Tax Credit Rate: The merged scheme provides a consistent 20% R&D expenditure credit (giving around 15% net benefit after corporation tax), replacing the former SME enhanced rates and RDEC rates.
Cash Payment Caps: Limits on payable credits apply, calculated as £20,000 plus 300% of a company’s annual PAYE and NIC liabilities. This cap aims to focus relief on companies with substantive UK payrolls and may affect cash claims, especially for small or subcontract-heavy businesses.
Subcontracted R&D Rules: Only the company commissioning R&D can claim relief, except in defined scenarios such as government contracts or overseas clients outside the UK tax system.
Restrictions on Overseas R&D Expenditure: To better ensure that relief supports UK-based innovation, claims for overseas R&D costs are limited with specific exemptions.
Increased Compliance and Notification Requirements: Claims must be notified to HMRC within six months of the accounting period end to be eligible, promoting timely and accurate submissions.

What Counts as Qualifying R&D?

Eligible activities include projects that contribute to scientific or technological advancement through overcoming scientific/technical uncertainties with systematic experimentation. This can involve developing new products, processes, software, or improvements that push forward knowledge in the field.

Qualifying expenditure covers staff costs, consumables, software licenses, some subcontracted work, and associated costs directly related to R&D projects.

Preparing Your Business for Year-End R&D Tax Relief Claims

As we enter the final quarter of 2025, businesses planning to claim R&D tax relief under the merged scheme must take stock now to ensure accounting and reporting processes fully align with the new requirements. With stricter compliance rules and tighter deadlines—including mandatory claim notifications to HMRC within six months of your accounting period end—proactive preparation is essential to secure your relief.

Consulting specialist R&D tax advisors remains a smart strategy to optimise your claim, navigate evolving legislation, and reduce the risk of HMRC challenges amid increasing scrutiny. Staying informed about the scheme’s mechanics—such as expenditure eligibility, caps on payable credits, and restrictions on subcontracted or overseas R&D—will help you maximize your tax credits and improve cash flow.

For innovative UK businesses approaching their 2025 year-end, early action ensures you fully benefit from the merged scheme’s incentives and stay compliant with all reporting obligations.

For a full overview of how we help businesses make the most of innovation-based tax savings, visit our Innovation Tax Reliefs service page.

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