Changes to the PAYE/NIC Cap

When the R&D tax credit scheme was introduced in 2000, HMRC operated a PAYE/NIC cap for the first 12 years. Following a substantial rise in ‘abusive’ claims HMRC have reintroduced the cap linking the payable tax credit a business can receive to its PAYE/NIC bill. Specifically the cap will address concerns over artificial structures with little or no employment or R&D activity set up mainly for the purpose of accessing the payable tax credit.

What is the PAYE/NIC Cap?

The new PAYE/NIC cap is calculated as a flat rate of £20,000 plus

  • 300% of the total PAYE/NIC payments made in one year (not just spend of R&D related staff)
  • 300% of any externally provided workers (EPWs) PAYE/NIC costs from a connected party
  • 300% of any relevant PAYE/NIC costs incurred by a connected party where the work has been subcontracted out

When is the Cap being introduced?

The cap will affect accounting periods beginning on or after the 1st April 2021.

Who will be affected by the Cap?

The following businesses could be affected by the cap:

  • Loss-making businesses where losses will be surrendered for a cash refund
  • Businesses with very little or no payroll expenditure
  • Businesses who have outsourced lots of work or incurred high prototype costs

Loss making companies will be capped on their payable tax credit in that year. Any payable credit over the cap can be carried forward to use in later years. 

Exemptions from the Cap

A company is exempt from the cap if it meets two tests :

  • If a company is creating, preparing to create, or actively managing intellectual property (IP)
    • IP relates to a patent, trademark, or copyright that is being developed. To qualify, the activities associated with the IP must have been undertaken by company employees, not by subcontractors or EPWs, and the company must hold the right to exploit the IP.


  • If a company’s expenditure on work subcontracted to, or EPWs provided by, a connected party is less than 15% of its overall R&D expenditure

What to do if your Company is affected by the Cap

If your business meets any of the above requirements and you would like to receive further information regarding how the PAYE/NIC cap might affect your R&D claim, please do not hesitate to contact a member of our finance team. They can help calculate how the cap may affect your subsequent R&D claim.

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