Can Directors' Dividends Be Included In A Claim For R&D Tax Credits?

Many owner-managed businesses structure director pay primarily through dividends for personal tax efficiency. It's a sensible approach in most contexts, but it has real consequences for your R&D tax credits claim, both in what you can claim and, if your company is loss-making, how much of that claim is payable.

Can dividends be included?

No. Directors' dividends are not qualifying expenditure for R&D tax credits.

Only amounts paid through PAYE (salary, bonuses, and certain reimbursed expenses) are eligible as staff costs in a claim. Dividends fall outside that definition entirely, regardless of how much R&D work the director carries out. A director who spends 80% of their time on qualifying R&D but draws a £12,000 salary and £90,000 in dividends can only claim on the £12,000.

That's often a significant amount left on the table.

What staff costs can be included?

The staff costs that qualify for R&D tax credits are:

• Gross salary and wages attributable to R&D work
• Employer's National Insurance contributions on those amounts
• Employer's pension contributions
• Reimbursed expenses directly related to R&D activity (travel to project sites, for example)

Where a member of staff splits their time between R&D and non-R&D work, you claim a proportion of their costs that reflects the R&D element. That apportionment needs to be documented and defensible; time records are the most straightforward way to support it, for directors and other staff alike.

HMRC applies the same evidential standard to directors as to anyone else. Seniority doesn't reduce the documentation requirement.

The PAYE/NIC Cap

For loss-making companies, the payable R&D credit is subject to a cap based on PAYE and NIC. Specifically, the payable amount cannot exceed £20,000 plus 300% of the company's total PAYE and NIC liability for the accounting period.

This is where a high-dividend, low-salary structure creates a double problem. Dividends don’t count as qualifying expenditure, and they also don't contribute to the PAYE/NIC liability that sets the cap. A loss-making company whose directors take most of their remuneration as dividends will have a low PAYE/NIC bill, which reduces the ceiling on what it can actually receive.

Here’s what that looks like in practice

A loss-making company has two director-shareholders, each on a £12,000 salary, plus two salaried employees. Total PAYE/NIC liability for the year is £18,000.

The cap on the payable credit is £20,000 + (300% x £18,000) = £74,000.

If the R&D credit calculated on qualifying costs (like subcontracting costs) exceeds that figure, the company can only receive £74,000. The remainder is carried forward.

If the directors' salaries were higher, both the qualifying expenditure and the cap would increase. The payable credit ceiling rises with PAYE liability.

Does this mean directors should restructure their pay?

Not automatically, and not without wider advice. The personal tax efficiency of dividends over salary is real, and increasing a salary to improve an R&D claim might cost more in income tax and NIC than the additional credit is worth. It's a calculation that needs to be done for your specific situation.

What it does mean is that you should understand the trade-off before making decisions about director remuneration. Many companies discover this interaction only after their first claim, at which point the previous year's structure is already fixed.

A few practical points:

• Review director remuneration in the context of your R&D claim each year, not as a separate exercise.
• If your company is loss-making, model the PAYE/NIC cap alongside qualifying expenditure. Both are affected by the salary/dividend split.
• Keep time records for directors involved in R&D. Even if the claim value is modest, good records protect you if HMRC opens an enquiry.

If you're unsure how your directors' remuneration structure is affecting your claim, don't leave it to chance. Contact Myriad to discuss your specific situation.