Take each person’s earnings, the employer’s secondary Class 1 National Insurance and the pension contributions the company paid, then include the proportion of that total matching the time they were directly and actively engaged in the R&D. The difficulty is in the detail: what counts as earnings, what the proportion rests on, and who belongs under a different cost head.
What the statute lets you include
CTA 2009 s1123 lists what counts: earnings consisting of money paid to a director or employee because of their employment; amounts paid in respect of expenses they paid, again because of the employment, but nothing in respect of benefits in kind; secondary Class 1 National Insurance contributions paid by the company; and contributions the company paid to a pension fund operated for directors or employees.
“Earnings consisting of money” does the exclusion work. HMRC reads the measure as salaries, wages, perquisites and profits whatsoever other than benefits in kind: cars, fuel, living accommodation and vouchers stay out, while cash reimbursements are not excluded. A reimbursed expense qualifies where the employee paid it to fulfil the requirements of the employment — travelling to a test site, yes; home-to-work travel, no. Redundancy payments are out. And only the claimant company’s own directors and employees sit in this head.
Dividends are the owner-manager trap
Everything s1123 reaches is paid because of an employment. A dividend is paid on shares: not earnings, and not paid because of the employment, so it cannot enter this head at all. A director on a modest salary who draws the rest of the year’s reward as dividends contributes very little here, however much of the year they spent solving the technical problem. In owner-managed companies that is the commonest reason a claim lands far below what the founder expected, and changing the mix is a personal tax question as much as an R&D one.
The proportion, and how to stand behind it
Section 1124 supplies the apportionment. Attributable staffing costs are those paid to, or in respect of, directors and employees directly and actively engaged in relevant R&D; where someone is only partly so engaged, the appropriate proportion of their staffing costs is treated as attributable. No method is prescribed, and no threshold applies at either end: a tenth of somebody’s year is as claimable as nine tenths.
Timesheets settle the question where they exist. Where they do not, HMRC’s guidelines for compliance accept that R&D costs are often an estimated proportion of known expenditure, and ask that the estimate is arrived at using evidence and reason and shown to be based on facts, with the methodology and the apportionment basis recorded. Our records page sets out what to keep. Staff costs are usually the largest head in a claim, and the apportionment behind them is among the first things a check tests: HMRC checked around one in six claims in 2023-24, its latest published figure.
Round numbers, illustrative rather than representative. An engineer on a £60,000 salary generates £8,250 of employer’s secondary Class 1 National Insurance — 15% above the £5,000 secondary threshold in 2026-27 — plus £3,000 of pension contributions at 5% of salary. Total £71,250. At 40% of their time directly and actively engaged, £28,500 enters the claim as staffing costs.
Supporting staff and the QIA figure
Time on qualifying indirect activities counts as well. The DSIT Guidelines list them exhaustively: maintenance, security, administration and clerical work, finance and personnel activities, insofar as undertaken for R&D; ancillary activities essential to the R&D; feasibility studies informing its strategic direction. Nothing outside that list qualifies. Clerical or maintenance work that would have been done anyway, running the payroll for instance, is not claimable, and s1124 says secretarial or administrative services in support of activities carried on by others are not themselves direct and active engagement. Keep the figure separate as you build it: the Additional Information Form requires the amount attributable to qualifying indirect activities for each project.
Who sits outside this head
Agency and contract people are counted elsewhere. Workers supplied through a staff provider are externally provided workers: where the company, staff provider and staff controller are not all connected, s1131 puts 65% of the staff provision payment attributable to their qualifying earnings into that separate head. A contractor engaged directly to carry out R&D gives a contractor payment under the contracted-out rules. Our subcontracted R&D page covers both.
Where to go next
The qualifying costs guide covers every cost head together. If the technical people are paid largely in dividends, or nobody has yet put a percentage against a name, talk to us before the figures reach the form.
Sources
- CTA 2009 s1123 — the staffing cost heads: earnings consisting of money paid because of the employment, amounts paid in respect of expenses other than benefits in kind, secondary Class 1 NICs paid by the company, and pension fund contributions paid by the company.
- CTA 2009 s1124 — costs attributable to directors and employees directly and actively engaged in relevant R&D, the appropriate proportion where engagement is partial, and secretarial or administrative support of others’ activities not amounting to direct and active engagement.
- CIRD83000, CIRD83200 and CIRD133100 — the claimant company’s own directors and employees only; the measure of staffing costs as salaries, wages, perquisites and profits whatsoever other than benefits in kind; the benefits in kind examples; the reimbursed expenses test; and redundancy payments.
- CIRD83800 — the appropriate proportion for an employee partly engaged on R&D, and the pre-2003 80/20 rule abandoned after representations from companies.
- Check what R&D costs you can claim — salaries, wages, pension fund contributions and secondary Class 1 NICs; the 90%-of-time, 90%-of-cost illustration; staff on supporting activities; and the exclusions for redundancy payments and clerical or maintenance work that would have been done anyway.
- GfC3: Recommended approach to claims and record keeping (part 5) — estimated proportions of known expenditure, estimates arrived at using evidence and reason and based on facts, and recording the claim methodology, sampling and apportionment basis.
- DSIT Guidelines (2023), paragraphs 31 and 32 — the exhaustive list of qualifying indirect activities, and that activities not described in paragraph 31 are not qualifying indirect activities.
- SI 2023/813, Schedule 2 — the Additional Information Form requirements, including in-house staffing costs as a separate category and the amount attributable to qualifying indirect activities.
- CTA 2009 s1131 — 65% of the staff provision payment attributable to qualifying earnings where the company, staff provider and staff controller are not all connected.
- Rates and thresholds for employers 2026 to 2027 — the 15% secondary Class 1 rate and the £5,000 annual secondary threshold used in the illustration.
- Approach to R&D tax reliefs 2023 to 2024 — compliance coverage of 17% of claims in 2023-24, up from 10% the year before.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.