Research and development (R&D) tax relief supports innovation by rewarding businesses that invest time and resources in creating or improving products, services and processes. This can be a valuable way for small and medium-sized enterprises (SMEs) to reduce their tax bills or receive a cash payment. The relief continues to serve as a core incentive for them, offering a welcome boost to businesses that push boundaries in fields such as engineering, technology, manufacturing and life sciences.
What is R&D tax relief?
R&D tax relief is a government-backed incentive designed to encourage businesses to experiment with fresh ideas or refine existing methods. These activities need to address a specific scientific or technological challenge. According to HMRC statistics, total R&D tax relief support reached £7.7bn in 2021/22 across 89,300 claims, with SMEs making up a significant portion of those applicants.
Most SMEs that take advantage of R&D tax relief do so under the SME scheme. Under this scheme in the 2025/26 tax year, eligible companies can usually deduct an extra 86% of qualifying expenses from their taxable profits. This means the total deduction can reach 186% of actual R&D costs. Loss-making SMEs can opt to surrender losses in return for an R&D tax credit payment, typically at a rate of 10% or 14.5% if classified as R&D intensive.
Which activities qualify
Activities must clearly attempt to overcome scientific or technological uncertainties. For many SMEs, this can include creating prototypes, experimenting with new production techniques or improving existing software. Projects do not need to succeed to qualify; failed experiments still fall under eligible costs, as long as they aimed to produce genuine advancement.
To identify if a project fits, consider whether your team worked to resolve questions that professionals in the field could not easily answer. If you can show evidence that your methods, testing or final outcomes involved genuine uncertainty, those expenses are likely to fit under R&D tax relief rules. For further official guidance, see the HMRC R&D relief webpage.
Potential tax savings
The exact benefit depends on your company’s taxable profit or loss position. A profitable SME might be able to reduce its corporation tax bill, while a loss-making SME may convert a portion of its tax losses into a cash repayment. With corporation tax rates for 2025/26 expected to remain between 19% for small profits and 25% for higher profits, effective use of R&D tax relief could significantly cut your bill.
This level of support can free up valuable funds that your business can redirect to new hires, updated equipment or additional projects. It is always wise to consult a professional on these matters. Our team at Pearson May has guided many businesses through the claim process, ensuring they make the most of the relief.
How to claim effectively
Claims for R&D tax relief go through your company tax return (CT600). A detailed R&D report that supports the figures can strengthen your submission. This often includes a breakdown of qualifying expenditure, plus a technical narrative explaining what the project set out to achieve and the methods used to reach that goal.
HMRC has increased its scrutiny of R&D claims in recent years, so it is important to prepare documents carefully. Pay special attention to correctly categorising eligible costs, such as:
• staff salaries, employer national insurance and pension contributions for individuals engaged in R&D
• subcontracted R&D work (with some restrictions)
• expenditure on materials and consumables directly used during the project
• software costs that support R&D.
These categories should be calculated with precision so you do not include costs that are outside the scope of R&D, such as general marketing or routine product maintenance.
Record-keeping tips
Good records help you show how much time and money went into each project. Tracking working hours, expenditure on consumables and subcontractor invoices is vital. Try to keep these records updated throughout the year instead of waiting until you prepare your tax return.
Consider timesheet software or project management tools that can link each employee’s hours to specific tasks. This approach – where every relevant cost is accurately tracked – helps avoid under-claiming or overstating.
Working with a trusted partner
Tax relief rules can appear daunting for many SMEs, especially when time is already stretched. Our role at Pearson May is to take on the heavy lifting so that you can focus on running your business. For more detailed guidance on R&D tax relief and how it might benefit your company, visit our dedicated page or get in touch directly.
We have been advising businesses for over 180 years, and we know the importance of delivering a supportive, personal service. Working with a knowledgeable accountancy firm can help you maximise your claim and reduce risk in the process.
Key takeaways
R&D tax relief helps SMEs retain cashflow by offsetting the expenses of genuine innovation. It underpins risk-taking and experimentation – vital parts of growth in highly competitive markets. With the right records, processes and professional support, your business can make the most of these incentives throughout the 2025/26 tax year.
If you want to explore how R&D tax relief can improve your finances, contact us today. We are ready to offer guidance that is tailored to your specific circumstances and ambitions. Send us a message or call to learn more.