Company Directors Doing R&D – Salaries vs Dividends vs Pensions?
The UK government’s Research and Development tax credit scheme has been rewarding innovative companies since 2000 and the scheme has never been better, but as a company owner/directors are you making the most of the benefits available, while also avoiding the pitfalls?
In this article we look how you can increase your R&D claim value depending on whether you pay yourself and other shareholding directors a salary or dividends and what difference company pension payments make to the value of a R&D claim. Plus we look at some of the more common mistakes in calculating salary costs for R&D claims.
What salary costs can be claimed as R&D?
Salaries costs often make up by far the biggest share of R&D costs claimed by UK Small and Medium Enterprises (SME). The eligible salary cost is frequently calculated by working out the percentage of time each person spent on R&D and applying that percentage to their total salary costs. So if someone spent 50% of their time on eligible R&D activities, 50% of their total salary costs could be claimed as R&D costs.
The total salary costs should include the employee’s Gross salary + Employers NI payments + Company Pension Payments for the relevant period. It is important that actual values are used and not estimated values as HMRC already has information on your salary costs, so errors are easily spotted and can lead to an enquiry.
Dividends vs Salary for Directors undertaking R&D?
If you are a shareholding directors undertaking R&D, or you have shareholding directors undertaking R&D in your company, which is often the case for many smaller companies, you can claim the relevant salary costs as R&D, but you cannot include Dividend income in your R&D costs.
It’s not uncommon for start-up companies to have several directors all undertaking R&D, but investing their time free, with a view to taking Dividends from profits later on. In this scenario, no matter how much time the Directors put into R&D, there is nothing they can claim against their time input, as there are so associated salary costs.
A more common scenario is where a company owner/director is undertaking R&D for 50% of their time and pays themselves a minimum salary of let’s say £8,000 in the relevant year. In this case 50% of £8,000 (i.e. £4,000), can be claimed as R&D expenditure. Assuming the company was profitable the R&D claim on £4,000 would be worth £1,040 (26% of the qualifying costs, calculated at current R&D claim rates and assuming a 20% corporation tax rate).
Any Dividends income you pay yourself above £5,000 is now taxable at the relevant tax rate depending on your level of personal income. It’s therefore worth asking your financial advisor or accountant to advise you on the most tax efficient combination of salary and dividend, in light of how much of your time is going into R&D activities and your target income from the company.
You might also want to consider whether you can delegate more of the R&D activity you undertake to a salaried member of staff as that will boost the return on your R&D investment.
Linda Eziquiel, Director.
Note: All articles in this blog are intended to provide general guidance only. Please contact us for specific guidance for your particular circumstances.