Director dividends and salaries: R&D tax relief claims

Staffing costs relating to R&D projects are generally accepted as eligible R&D expenditure. That means these costs can usually be included as part of an R&D tax relief claim.

Examples of these staffing costs are gross salaries, employer National Insurance contributions (NICs), and employer pension contributions.

But what about company directors who may be remunerated through a combination of salary and dividends?

Can directors’ dividends be included in an R&D tax relief claim?

Directors' dividends cannot be included in R&D tax relief claims; this is because they do not form part of the qualifying categories of R&D expenditure.

Why this matters for R&D tax relief claims

The most tax-efficient remuneration plan for company directors is generally considered to be a combination of a small salary topped up by dividends.

But if the company is conducting qualifying R&D activities, and the director is involved in the project, this remuneration plan may no longer be optimal.

Key question: How much is the director involved in the R&D?

If planning an optimal remuneration package when R&D is involved, the most important factor is the extent to which the director was directly involved with the project. This will need to be calculated and demonstrated as part of any R&D claim.

As a general rule, the greater a director’s involvement in the qualifying project, the more likely it is that a larger salary and smaller dividend route is actually better. If their involvement was only minor, a small salary topped up by dividends is likely to be preferable.

Example

As an example, suppose a director’s remuneration package is made up of £12,570 in salary (the maximum salary before incurring liability for Class 1 Primary NIC), and £87,430 in dividends. This makes for a total remuneration package of £100,000.

• Only the salary is a qualifying staffing cost for the claim; more specifically, only the portion of this that can be attributed to time spent working on the R&D project.
• For example, if a director spent 70% of their salaried time working on an R&D project, then 70% of the salary would be an eligible staffing cost.
• The £87,430 dividend is not an eligible staffing cost and cannot be included in the claim.
• This would mean that the total eligible expenditure for the purposes of the R&D claim would be 70% of £12,570, or £8,799. The tax saving for R&D equates to £1,891 on current rates for FY23/24.
• This effectively reduces the cost to the company of providing the salary element of the remuneration package.

How a different split of salary vs dividends would change this

Using the same total remuneration package as the above (£100,000), a different split between salary and dividends would drastically change the amount of eligible expenditure for the R&D claim.

If the director instead took a £70,000 salary and a £30,000 dividend, the eligible staffing cost, assuming the same 70% R&D involvement, would be £49,000. The tax saving for R&D then equates to £10,535.

These examples have been included to demonstrate the impact of R&D relief only and do not show the effects on other taxes and the net income position for the individual.

Figuring out the best route

Ultimately, the optimal remuneration package for a director shareholder involved in R&D will depend on several factors, relating to their total earnings and various thresholds for Income Tax, NICs, dividend taxes, as well as available reliefs for both the individual and the business.

For directors that are heavily involved with R&D, a larger salary and smaller dividend package may be the best remuneration package. If their involvement is only minor, then this likely will not apply.

We strongly recommend speaking to an expert in tax planning and R&D tax relief claims for advice on optimising a director’s remuneration package if their company conducts qualifying R&D activity.

If you require advice on this issue, contact the Radius team today and we’ll be happy to help.

• Read more: 10 tips to ensure a successful R&D Tax Relief claim