R&D Tax Credits vs R&D Grants: Which Should Startups Prioritise?

R&D tax credits and R&D grants solve different problems

Two of the most powerful non-dilutive funding tools in the UK are R&D tax credits and R&D grants. Both exist to encourage innovation, but they serve very different purposes and suit different stages of growth.

Founders often ask which is “better.” The more useful question is which is right for your situation. At a high level:

• R&D tax credits reward companies for R&D they have already undertaken

• R&D grants fund specific innovation projects before or during delivery

One supports activity retrospectively.
The other supports it prospectively.

This timing difference has real implications for cash flow planning, risk, and operational focus.

How R&D tax credits work in practice

The UK R&D tax relief scheme allows eligible companies to claim relief on qualifying R&D expenditure where they are attempting to resolve scientific or technological uncertainty.

In practical terms, this often includes:

• Developing new software or platforms

• Creating new products or features

• Improving performance, scalability or integration

• Experimentation and prototyping

• Technical problem-solving that isn’t straightforward

For startups, particularly in SaaS and tech, these activities are common rather than exceptional.

Why many startups lean on tax credits

R&D tax credits tend to become a reliable funding layer because they are:

• Non-competitive

• Repeatable each year

• Scalable with spend

• Available across most sectors

• A source of cash repayments for loss-making companies

They don’t require you to “win” funding — only to meet the criteria and document your work properly.

From a CFO perspective, this predictability matters. It allows R&D support to be built into financial forecasts rather than treated as a bonus.

How R&D grants fit into the picture

R&D grants are typically offered through Innovate UK and similar bodies. They are designed to push forward innovation in priority areas such as climate, deep tech, AI, and life sciences.

They can be transformative when secured, but they are fundamentally different in nature.

Grants are:

• Competitive

• Project-specific

• Milestone-driven

• Reporting-heavy

• Often collaborative

They also require a clear narrative around impact and innovation beyond commercial goals.

Where grants shine

Grants are particularly powerful when:

• R&D is capital intensive

• The innovation has national or societal relevance

• You are tackling frontier technology

• External validation strengthens your credibility with investors

But they come with uncertainty. Many strong applications are unsuccessful simply due to oversubscription.

What R&D Grant Funding Is Available

In the UK innovation ecosystem, grants continue to be a major source of non-dilutive funding for R&D - and the Autumn Budget 2025 signalled sustained government commitment to boosting R&D spend.

Chancellor Rachel Reeves confirmed increased investment that aims to grow total R&D expenditure to around £22.6 billion by 2029–30, with significant allocations directed at high-growth and science-driven sectors such as digital, advanced manufacturing, AI, life sciences and net-zero technology.

That translates into ongoing funding streams through:

• UKRI / Innovate UK programmes — competitive grants for feasibility studies, collaboration projects and market-ready innovations.

• Regional innovation funds — managed by Growth Hubs, local enterprise partnerships, devolved administrations and city-region bodies.

• Sector-specific grant schemes — ranging from advanced manufacturing and medtech to clean tech and agri-innovation.

• EU-linked opportunities — some Horizon Europe-type programmes remain accessible even post-Brexit.

Grant sizes vary widely: some are micro or feasibility funds (in the tens of thousands) while others support larger collaborative programmes (up to several million).

Important nuance: Unlike tax credits, grants are not guaranteed, are often project-specific, and carry application and reporting requirements. But they can provide capital upfront, support riskier research phases, and strengthen your case with future investors.

The R&D Merged Scheme - And How It Works With Grants

The UK has fundamentally changed how R&D tax incentives operate with the introduction of a merged R&D tax relief scheme from April 2024.

What the merged scheme is

Instead of separate SME and RDEC schemes, most companies now claim under a unified merged R&D expenditure credit regime that:

• applies to accounting periods from 1 April 2024 onwards

• provides a 20% above-the-line credit on qualifying R&D expenditure

• is generally taxable, so the net benefit depends on your Corporation Tax position.

There’s also an Enhanced R&D Intensive Support (ERIS) stream for loss-making SMEs where R&D spend makes up a significant portion of overall costs.

Can You Claim Both Grants and R&D Tax Credits?

Here’s where it gets interesting for founders.

Under the old SME scheme, subsidised R&D (i.e., where you received a state grant) could reduce or shift your eligibility for enhanced tax relief — making claims less generous if not structured carefully.

Under the new merged scheme, some of those restrictions have been simplified: grant-funded projects don’t automatically eliminate tax credit eligibility in the same rigid way they once did.

What this means in practice:

• You can access grant funding for an R&D project and still claim R&D tax credits on the qualifying costs that aren’t fully covered by the grant.

• The interaction is not an either/or choice — but it does require planning around how costs are attributed and how the grant is documented.

• Appropriate planning ensures you don’t erode your tax credit benefit unnecessarily while still benefiting from grant capital.

This combination — planning grant applications alongside your R&D tax claim — can materially improve your funding outcome compared to pursuing only one route.

In other words: rather than choosing between grants and tax credits, the sophisticated strategy is how and when to layer them to maximise cash benefit and minimise compliance friction.

A broader thought leadership view

The most sophisticated founders don’t see R&D incentives as “free money.” They see them as part of capital strategy.

Used well, they can:

• Extend runway without dilution
• Support bolder product bets
• Improve capital efficiency
• Signal credibility to investors
• Strengthen long-term R&D culture

Used poorly, they become reactive claims or distracting funding hunts. The difference is intent and planning.

The bottom line

R&D tax credits are generally the most accessible and consistent support mechanism for innovative UK startups.

R&D grants can be powerful but are selective and time-intensive.

For most founders, the question isn’t either/or — it’s how to sequence and combine them intelligently.

About Accountancy Cloud and Xeinadin

Accountancy Cloud specialises in accounting and finance support for startups and scale-ups, working with founders from early stage through to Series A and beyond. If you are looking for the best startup accountant for UK startups and scale-ups, look no further.

As part of Xeinadin, this specialist expertise is supported by the scale, infrastructure and depth of a leading national accountancy group.

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