Quick answer: The PAYE cap limits the payable R&D tax credit a loss-making company can claim in cash to £20,000 plus three times its total PAYE and Class 1 NIC liability for the period. It applies to accounting periods beginning on or after 1 April 2021, with an exemption for companies genuinely developing their own intellectual property.
What is the PAYE cap?
The PAYE and NIC cap, usually abbreviated to the PAYE cap, restricts the amount of payable R&D tax credit that a loss-making company can claim in cash. For accounting periods beginning on or after 1 April 2021, the cap is £20,000 plus three times the company's total PAYE and Class 1 NIC liability for the period. A company is exempt from the cap if it is genuinely developing intellectual property and the connected-party subcontractor and EPW cost is limited.
How does HMRC define the PAYE cap?
HMRC guidance on the cap is at CIRD90500 for the merged scheme, CIRD90710 for ERIS and CIRD89600 for the old SME scheme. The legislation is at section 1058A of the Corporation Tax Act 2009 for the old SME rules and the merged-scheme equivalents in Chapter 1A of Part 13. The IP-development exemption conditions are set out at CIRD90520.
What does the PAYE cap look like in practice?
A loss-making software SME has a pre-cap payable R&D credit of £400,000 and a total PAYE and NIC liability of £80,000 for the period. The cap is £20,000 plus three times £80,000, which equals £260,000. The company surrenders £260,000 of credit in cash and carries the remainder forward as a loss under the usual rules. The free eligibility calculator can help estimate whether your own payable credit is likely to be affected by the cap.
Related terms
Frequently asked questions
For accounting periods beginning on or after 1 April 2021, the cap is £20,000 plus three times the company’s total PAYE and Class 1 NIC liability for the period.
Yes. A company is exempt from the cap if it is genuinely developing intellectual property and the connected-party subcontractor and EPW cost is limited, as set out in the IP-development exemption conditions at CIRD90520.
The amount above the cap is not paid in cash for that period. In the worked example on this page, a company surrenders the capped amount and carries the remainder forward as a loss under the usual rules.