Introduced by the Government in 2000 as an incentive to promote innovation, Research and Development (R&D) tax credits provide tax relief for eligible activities carried out by UK businesses.
Tax relief is calculated based on the company’s spend on R&D, providing relief of up to 230% on qualifying activities. You can claim under the SME R&D relief scheme if you’re an SME with less than 500 staff and a turnover of under €100m, or a balance sheet total under €86m.
Figures show that R&D claims are on the rise, however, some business owners could be missing out on significant tax relief because they are not making the most of the salaries of those involved in their R&D activities. For those staff who are “directly and actively engaged” in an R&D project, the costs you can claim include salaries, bonuses, class 1 NICs and pension contributions. You may also be able to claim for administrative or support staff who directly support an R&D project.
A common remuneration strategy for owner managers is a nominal director’s salary topped up by dividend income. In most cases this is the most tax efficient way. However, if you’re a director who takes part in ‘hands on’ R&D activities, your salary could count as a qualifying expense, meaning there is the potential for tax planning opportunities. By increasing the level of salary, you may be able to optimise the level of R&D tax relief available whereby the value of the R&D relief exceeds the additional tax paid on the salary.
For example, and taking all taxes into account, a £60,000 salary that is 75% qualifying for R&D relief would save more than £6,000 per year, compared to a £9,000 salary with £51,000 in dividends.
Dividends remain a viable method of extracting profits from a business and we do not advise clients to simply switch from dividends to salary. Care must be taken to calculate the most effective strategy in terms of dividends and salary amounts. Contact an advisor who can look at your specific circumstances and make sure you are getting the most from your R&D claim.
To see what you could claim, contact David Herd, Lead R&D Tax Advisor, on david.herd@championgroup.co.uk.
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