Definition
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 HMRC defines it
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.
Practical example
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.