While the move to a unified R&D tax relief regime has aligned many aspects of the scheme, one important restriction that continues to apply, particularly for early-stage or loss-making businesses, is the PAYE/NIC cap on repayable credits. Originally introduced to mitigate abuse of the scheme by artificial company structures with little to no UK employment footprint, this cap remains a critical consideration for companies expecting a cash repayment rather than a credit offset.

Under the cap, the amount of repayable R&D tax credit that a loss-making company can claim is limited to 300% of its total PAYE and NIC liability for staff directly engaged in the business, plus an additional £20,000 annual allowance. This ensures that companies accessing refundable credits demonstrate a meaningful level of UK employment and payroll activity, directly tying R&D relief to domestic job creation and economic contribution.

For genuine start-ups, R&D-intensive businesses, or companies heavily reliant on subcontractors or offshore teams, the PAYE cap can significantly limit cashflow benefits, even where substantial qualifying R&D expenditure is being incurred. Importantly:

• Only employees on the company’s direct payroll contribute to the cap calculation.

• Payments to subcontractors, consultants, and personal service companies do not count towards PAYE/NIC thresholds.

• The cap can create particular challenges for software, fintech, and service-based businesses where lean internal teams are supplemented by external development resources.

While not all claimants are impacted, particularly profitable companies claiming through tax offsets, the cap remains a crucial consideration in financial modelling, especially for early-stage loss-making businesses seeking to rely on R&D relief to help fund ongoing innovation.

Proper planning, including early consideration of employment structures, subcontractor use, and in-house capability development, can help businesses maximise relief while remaining compliant with the cap. Additionally, maintaining clear payroll records and identifying qualifying R&D staff accurately is essential in supporting claims where repayable credits are sought.

At Westlock Partners, we work closely with clients to assess PAYE/NIC exposure and ensure their R&D claims are fully optimised within these parameters, providing transparency, accuracy, and foresight to manage the financial impact of this ongoing restriction.