R&D Tax Relief in the UK vs US: A Practical Comparison

Find out how the UK’s R&D Tax Credit schemes compare to R&D incentive programs in the USA.

Tax relief is no longer a niche lever for innovators, it’s a core part of how governments support growth around the world, how start-ups extend runway, and how global companies choose where to build. Both the UK and the US offer flagship R&D incentive programs, but they’re built on different models. One is volume-based, the other incremental. One is cash-focused, the other is largely non-refundable.

If you’re in AI, deep tech, life sciences, or any capital-hungry field, understanding the real value of these schemes can mean the difference between months of extra burn or an unused tax asset.

This guide breaks down the UK and US R&D tax schemes side by side – how they work, who benefits, what’s changed recently, and what to watch out for.

Summary

Feature	United Kingdom	United States
Headline rate:	20% (RDEC), 27% (ERIS)	20% (Reg), 14% (ASC)
Effective benefit:	~15%–27%	~6%–10%
Refundability:	Yes	No (except payroll offset)
Complexity:	Moderate	High
Grants allowed?	Yes (partial)	No
Startups supported?	Strongly (ERIS)	Yes, limited window
State-level add-ons:	No, central scheme only	Yes, varies by state

United Kingdom

R&D Expenditure Credit & ERIS

As of April 2024, the UK has unified its two main R&D schemes (the SME and RDEC schemes) into one merged R&D Expenditure Credit (RDEC) model.

For loss-making SMEs that spend heavily on R&D, there’s also a second pathway: Enhanced R&D Intensive Support (ERIS).

• RDEC: A 20% above-the-line tax credit on qualifying R&D spend. It’s taxable, so the net benefit is around 15%–16.2%, depending on your tax rate.
  
• ERIS: Designed for loss-making, R&D-intensive SMEs (spending ≥30% of costs on R&D). Offers a non-taxable cash credit worth up to 27% of R&D spend
  

Key Points

• Refundable: Yes – loss-makers get cash, subject to a PAYE/NIC cap
  
• Volume-based: Relief applies to all qualifying R&D spend, not just increases
  
• Compliance tightening: You must notify HMRC within 6 months of year-end to claim for the first time, and keep detailed supporting evidence
  
• Overseas R&D: Limited to UK-only costs in most cases from 2024 onward

United States

The U.S. R&D tax credit system is older, layered, and rooted in a different philosophy: it rewards an increase in R&D spend rather than total R&D spend.

That means if your R&D spend is flat year-to-year, you might see limited benefit. But if you’re increasing your R&D budget, especially in the early years of a product or platform, the U.S. system will reward that growth.

It’s also a tax credit, not a refund, so it’s most valuable to companies that are already profitable (or close to being profitable). Early-stage businesses get limited benefit, unless they qualify for the payroll tax offset.

Unlike the UK’s above-the-line credit (which shows up in your P&L and gets taxed), the U.S. credit is below the line and not taxable. It reduces your federal tax liability directly but it doesn’t touch your earnings.

And while the federal credit gets most of the attention, there’s a second layer: state-level credits. More than 30 states offer their own R&D incentives – some refundable, some non-refundable, some linked to hiring or local spend. In some cases, these can double your total benefit.

Federal Credit Options

There are two different federal credit options:

• Regular Credit – 20% of R&D spend above a historical base (calculated from 1980s-era data or a startup formula)
• ASC (Alternative Simplified Credit) — You get a credit worth 14% of the portion of your R&D spend that goes above 50% of your average from the last 3 years. Here’s how it works:
  • Add up your R&D spend from the last 3 years
  • Divide by 3 to get your average
  • Take 50% of that average — that’s your “base amount”
  • You only get a credit on the amount you spent this year that’s above that base amount.
• If you had no R&D spend in the last 3 years, you get a flat 6% credit on all your current R&D spend instead.

Important clarification:
You don’t need 3 full years of R&D spend to use ASC. The IRS lets you average whatever prior years you have.

If you’ve only spent in 1 or 2 of the last 3 years, you just average those and still get 14% on the excess above 50% of that base.

You only get the 6% flat rate if all 3 prior years (or all the years you’ve existed) had no qualifying R&D spend.

“If the taxpayer had qualified research expenses in fewer than three preceding years, the average is based on the number of years in which the taxpayer had such expenses.”
— IRS Form 6765 Instructions

Company Situation	Prior 3 Years of R&D Activity	ASC Base Calculation	Statutory Rate	Effective Benefit on Total R&D Spend
Brand new company (Year 1 of R&D)	No	–	6% of all current R&D spend	6%
Company in Year 2 (R&D in Year 1 only)	Partial (1 year)	50% of Year 1 R&D spend	14% of R&D spend above ASC base	~5%–9%
Company in Year 3 (R&D in Years 1 and 2)	Partial (2 years)	50% of 2-year average	14% of R&D spend above ASC base	~5%–9%
Company in Year 4+ with 3 years of R&D	Full (3 years)	50% of 3-year average	14% of R&D spend above ASC base	~6%–10%
Established company, just started R&D	No	–	6% of all current R&D spend	6%
Company with mixed R&D history (e.g. R&D in 1 of last 3 years)	Partial	50% of average (zero years included)	14% of R&D spend above ASC base	~5%–8%

Here’s an example of the Alternative Simplified Credit calculation for a company in the US:

In practice, most companies see 6–10% of total R&D spend come back to them as a credit – because the credit is incremental, and not volume-based.

Qualified Research Expenses (QREs)

To qualify, expenses must meet a strict Four-Part Test and be technological in nature. Eligible costs include:

• Wages of technical employees
• Supplies consumed in R&D
• 65% of payments to subcontractors
• Leased cloud/computing time (if tied to R&D)

Both the US and UK limit tax relief to science or technology-based innovation, but the US rules are generally narrower. The IRS requires proof of technical uncertainty, experimentation, and a qualified purpose. The UK accepts a wider scope (e.g. software development, data science, and internal tooling), and allows for claims on some indirect costs like utilities and certain overheads that wouldn’t qualify under US rules.

What If You’re Loss-Making in the US?

If you’re not paying federal income tax, you can’t use the R&D credit right now. It’s non-refundable—so it sits on your books and carries forward for up to 20 years.

Startup Payroll Offset

There is one valuable exception: the payroll tax offset.

You can use it if your business is:

• Less than 5 years old, and
• Has less than $5M in gross receipts

In this case, you can use up to $500,000/year of your R&D credit to offset payroll taxes (Social Security and Medicare). That’s a real-time benefit, even pre-revenue.

Loss-making companies are treated very differently under the two systems:

	United States	United Kingdom
Refundability:	Non-refundable (credit carries forward 20 yrs)	Refundable (cash benefit even if no tax payable)
Startup support:	Payroll tax offset up to $500K/year if less than 5 years old and less than $5M in revenue	ERIS scheme gives up to 27% back for R&D-intensive SMEs
Caps:	$500K limit on payroll offset	PAYE/NIC cap applies, but more generous in cash terms
Time limits:	Payroll offset available for first 5 years only	ERIS applies as long as you’re R&D-intensive

State Credits for Loss-Makers

Some U.S. states do offer refundable or hybrid credits:

• Arizona: Refunds up to 75% of excess credit
  
• Minnesota: Small biz refundable portion
  
• New York: Grants + payroll-tied R&D relief
  

These can provide real cash, even when the federal scheme can’t.

The UK only operates a single national scheme for R&D tax credits, regardless of where your business is based. 

Grants and R&D Relief

• UK: Grants no longer block relief, but funded costs usually fall under the lower RDEC rate, not ERIS
  
• US: If someone else funds your R&D (e.g. a government grant or customer contract), that spend is excluded from the credit. The IRS says only self-funded R&D counts.

What Should You Do?

• In the UK: Plan early, meet the compliance deadlines, and check ERIS eligibility if you’re loss-making and R&D-heavy.
  
• In the US: Choose ASC vs Regular based on your history, model the benefit, and don’t forget state credits.
  
• Globally: R&D tax relief isn’t just a cost-saving – it’s a strategic location factor. It shapes hiring, funding, and runway.
  

Done right, R&D tax relief can be a source of real, early cash – not just a bonus at year-end.