How to know if your R&D spend is right for your business

An appropriate R&D budget should support a clear development objective, be affordable within your funding plan and be reviewed against evidence of progress. A percentage of revenue can provide context, but it cannot tell you what an individual project should cost.

The starting point is to understand what your business needs to develop, what remains uncertain and how much work is required to reach the next meaningful milestone. You can then compare that plan with sector evidence, available resources and the potential commercial return.

How much do companies spend on R&D?

R&D spending varies significantly between industries. The World Intellectual Property Organization’s Global Innovation Index 2025 examined 2024 data for 1,510 of the world’s leading corporate R&D investors and reported the following sector-level spending ratios.

These figures describe major global R&D investors, not typical UK SMEs. They are comparison points, not recommended budgets.

For UK context, the Office for National Statistics estimates that businesses performed £55.6 billion of R&D in 2024. That national total does not establish what an individual company should spend.

When choosing peers, look beyond the sector label. Consider company size, development stage, business model and whether the reported figures include the same types of expenditure.

How do you calculate R&D spending as a percentage of revenue?

A commercial benchmarking measure is:

R&D intensity = (R&D expenditure ÷ revenue) × 100

For example, a company planning £200,000 of R&D expenditure against £2 million of annual revenue would have a planned R&D-to-revenue ratio of 10%.

Use the same reporting period and a consistent definition of expenditure. Check whether figures include capitalised development or outsourced work before comparing them with another business.

The ratio also needs interpretation. It can rise because revenue has fallen, even when R&D spending has not changed. For a pre-revenue business, dividing expenditure by revenue is not useful; focus instead on available cash and the cost of reaching the next development milestone.

This commercial ratio is different from the expenditure-based test used for enhanced R&D intensive support, explained below.

How to build an R&D budget that supports your business

1. Define what the investment needs to establish

Start with the technical and commercial questions, rather than selecting a percentage and finding projects to fill it.

For example, an engineering business might need to establish whether a prototype can meet a performance requirement under specified operating conditions. Its first budget should cover the work needed to investigate that question—not automatically the full cost of launching a product.

Set out the expected evidence, who will assess it and the decision it will inform. That decision could be to continue development, investigate another approach or stop a project that no longer has a credible route forward.

2. Cost the work from the bottom up

Estimate the people, equipment, materials, software and external expertise required. Allocate staff costs according to the time expected on the project, and avoid counting the same resource twice.

An illustrative annual development budget might look like this:

This is a planning example, not a recommended spending level or an R&D tax calculation.

The business might separately reserve £30,000 for additional testing or delays, giving it a £230,000 funding envelope. An unspent contingency is not expenditure already incurred, so keep it separate from actual project costs.

Also budget for any manufacturing, sales or operational investment needed after development. These requirements should not disappear simply because they sit outside the R&D work.

3. Test whether the business can fund the plan

An annual budget does not show when cash will be needed. The British Business Bank’s cash-flow forecasting guidancerecommends mapping receipts and payments to the weeks or months when money actually enters or leaves the business.

For R&D planning, test a base case and a downside case. What happens if an experiment needs repeating, a supplier is delayed or commercial income arrives later than expected?

Include the business’s other commitments, not just project costs. Model anticipated grants and tax relief separately from cash already available, with realistic assumptions about eligibility, timing and uncertainty.

How can you tell whether your R&D spend is delivering value?

Measure progress according to the stage of the work.

During research and early development, assess what has been learned: which technical questions have been answered, which approaches have been ruled out and what evidence supports the next step.

During testing and validation, compare results against defined requirements. Depending on the project, these might include reliability, accuracy, yield, energy use or performance under real operating conditions.

After commercialisation, assess customer adoption, contribution margin, operating savings or other intended business benefits against the investment made.

This avoids judging an early-stage research project solely by immediate sales, or assuming that a high number of prototypes or patents demonstrates commercial value.

As a practical starting point, review spending and cash monthly, with a fuller technical and commercial review each quarter or at major milestones. Repeated overruns without clearer evidence warrant investigation; a well-documented decision to stop an unsuitable approach can be a useful result.

How do R&D tax relief and grants affect your budget?

Funding should support a sound development plan, rather than determine whether a project is worth pursuing.

Separate your project budget from qualifying R&D expenditure

Not everything in a development budget qualifies for R&D tax relief. HMRC’s eligibility guidance requires a project to seek an advance in science or technology through resolving scientific or technological uncertainty.

Costs then need a separate assessment. Our guide to R&D qualifying costs and expenditure explains the categories and restrictions to consider.

Do not apply a headline relief rate to the entire project budget without checking which activities and costs qualify.

Understand the relevant relief calculation

For accounting periods beginning on or after 1 April 2024, the merged R&D expenditure credit scheme provides a 20% taxable credit on qualifying expenditure. That is not the same as receiving 20% of the full development budget in cash.

Eligible loss-making SMEs may instead qualify for enhanced R&D intensive support (ERIS). Its intensity condition generally requires relevant R&D expenditure to represent at least 30% of total relevant expenditure, applying the rules for connected companies where relevant. A grace period can apply in qualifying circumstances.

The ERIS test is based on expenditure, not revenue. A company spending 30% of turnover on development does not automatically meet it.

Use our R&D tax calculator for an indicative estimate, then check the qualifying costs and assumptions before incorporating a benefit into your funding forecast.

Assess grant opportunities against the project

Explore our Grant Finder for opportunities relevant to your sector and development stage.

Before relying on an award, check the competition’s eligible activities, contribution requirements, permitted start date and payment arrangements. Keep a clear distinction between funding you are applying for and funding already secured.