Blog: Tax Talk – Pensions contributions & director’s remuneration

By Nigel Holmes, Senior Tax Specialist at Catax

The most common qualifying cost we see in a Research & Development (R&D) tax relief claim is, of course, staff costs. As a reminder, this is the R&D proportion of gross pay through the payroll, together with proportional amounts of employers National Insurance, employers pension contributions**, as well as reimbursed expenses that relate to the R&D (not claimable if these costs are paid direct by the company, a strange quirk in the rules).

However, there are two common issues we see when dealing with staff costs:

• It is common practice for Shareholder Directors to remunerate themselves through a small salary, which does not trigger a National Insurance liability, and the remainder through dividends. This carries risks – a dividend is not a reward for effort but a return on profit and may be seen by HMRC as akin to a salary and therefore should be taxed as such.

It is not our role to advise on these risks. Even if structured well, this may not be the most tax efficient way to draw remuneration. For Shareholders actively involved in R&D then the additional Corporation Tax relief from an R&D claim may more than compensate for the additional National Insurance cost. Roughly speaking, Shareholders spending 70% or more of their time in R&D may be better with 100% salary as opposed to dividends. Once again, we are not advisers so full advice should be taken as there may be other reasons why a dividend is preferred or other Shareholders to consider (dividends are paid in proportion to shareholdings of a particular share class).

• For start-ups in particular, often individuals do not match their R&D effort with an appropriate cost charge. As R&D tax relief works on an uplift in a cost, there has to be a cost to make a claim. Even if cash flow does not allow a salary to be drawn, it is still possible to charge a salary through the books and through a PAYE scheme to be pulled when cash flow allows (it creates a loan to the individual in the accounting records). This, at least, provides a cost to qualify for R&D tax relief, however small.

**As most businesses are now within auto-enrolment we expect to see a greater amount of employer pension contributions being claimed for R&D. This, at least, goes some way to offset this additional cost for employers. Even large one-off contributions count. So let’s say a Shareholder or Director was spending 50% of their time on R&D. The small salary or remainder dividend structure is probably still best in this instance but an additional £40,000 pension contribution would attract tax relief of £66,000 ((£40,000 x 100%) + (£40,000 x 50% x 130%)).