What HMRC Accepts
The rules on staffing costs for R&D tax credits are in Part 13 Chapter 9 of the Corporation Tax Act 2009, with HMRC guidance at CIRD84000. Three elements of an employee's cost are claimable in respect of time spent directly and actively engaged in qualifying R&D activity:
- Gross salary. PAYE-processed wages and salary. Bonuses that are paid through PAYE are claimable. Share-based awards settled through PAYE are generally claimable; those that fall outside PAYE (such as unapproved options exercised without PAYE processing) are not.
- Employer's National Insurance contributions. The secondary Class 1 NIC borne by the company on the employee's PAYE earnings is claimable in the same proportion as the salary.
- Employer's pension contributions. Company contributions to a registered pension scheme on behalf of the employee are claimable in the same proportion. Salary-sacrifice pension arrangements require care: the reduced salary plus the increased employer contribution both form part of the claimable base.
Claimable staff must be directly and actively engaged in qualifying R&D activity as defined by the BIS Guidelines on the Meaning of Research and Development for Tax Purposes (2004). Merely supporting R&D through administrative or facilities work is not enough. The staff have to be contributing to the resolution of scientific or technological uncertainty.
Apportionment: How to Calculate the R&D Percentage
Most employees spend only a fraction of their time on qualifying R&D activity. Apportionment establishes the percentage of each individual's cost that is claimable. HMRC expects the method to be consistent, documented, and evidence-backed.
Three apportionment methods are in common use.
Contemporaneous timesheets. The strongest approach. The employee records hours worked on R&D projects against hours worked on non-R&D activity, typically using project codes in a timesheet or task management system. The percentage falls out of the data. This method is preferred by HMRC and generally unchallengeable when the records are complete.
Sprint and project record analysis. Where timesheets are not kept but agile project records, Jira tickets, sprint retrospectives, and board exports are available, the data can be aggregated to estimate time allocations. This approach is widely accepted where the underlying records are genuine and contemporaneous.
Structured interviews plus corroborating records. Where neither timesheets nor detailed project records exist, structured interviews with the technical leads can produce a reasonable apportionment, provided they are backed by supporting evidence such as release calendars, deployment logs, or meeting minutes. This approach carries more enquiry risk than the other two.
What Is Included
- Gross salary paid through PAYE for time on qualifying R&D activity.
- Employer Class 1 secondary NIC on that salary.
- Employer contributions to a registered pension scheme for the employee.
- Bonus payments processed through PAYE, apportioned alongside salary.
- Holiday pay for the R&D-apportioned fraction of the year (since this forms part of employment cost).
- Sick pay where borne by the employer and processed through PAYE.
- Reimbursed expenses paid through payroll that relate to R&D activity (following the 2014 guidance revision; evidence threshold is high).
What Is NOT Included
- Dividends paid to employees or directors. Not salary; not claimable.
- Benefits in kind such as company cars, private medical insurance, and childcare vouchers. Generally excluded.
- Redundancy payments.
- Ex gratia payments unrelated to work performed.
- Share option gains not processed through PAYE.
- Agency or contractor charges — these fall under externally provided workers or subcontractors, not staffing.
- Recruitment fees, training course fees paid to external providers, and other non-payroll people costs.
- Salaries of staff whose roles are purely administrative, commercial, marketing, or sales.
Merged Scheme Considerations
Staffing cost rules themselves were not materially changed by the April 2024 merger. Salary, NIC, and pension remain claimable on the same basis as before. However, three indirect effects of the merger are worth noting.
First, the 20% above-the-line credit rate means that for a profitable company paying 25% corporation tax, the net benefit on staff costs is approximately 15p per pound of qualifying expenditure. For qualifying R&D-intensive loss-makers under ERIS, the rate is 27% and the net benefit can reach approximately 27p per pound.
Second, the heightened HMRC compliance focus after April 2024 has made robust apportionment evidence more important. Weak apportionment methodology is now a primary enquiry trigger. For context, see our guide to the merged scheme.
Third, the broader tightening of the rules around overseas workers (for EPWs and subcontractors) has indirectly increased the relative share of claims made up by UK staffing costs. Companies that previously relied heavily on offshore development teams are concentrating more of their R&D claim on UK employees.
Common Enquiry Risks
Staffing cost apportionment is the single most-enquired area of R&D claims. Six risk points recur.
- 100% apportionment for dedicated engineers. Rarely defensible. Holidays, training, and general business meetings should reduce the percentage.
- Including dividends in claimed staff cost. A consistent error in owner-director-led companies.
- Claiming executive time without clear technical contribution. CEOs and CFOs attending sprint reviews do not automatically qualify.
- Inconsistent apportionment methodology across employees. If some staff have timesheets and others have flat percentages, the whole claim looks weaker.
- Aggregating staff costs without individual evidence. HMRC increasingly expects staff-by-staff breakdowns rather than a single blended percentage applied to the whole payroll.
- Missing salary sacrifice detail. Pension salary sacrifice shifts value from salary to employer contribution. Both components need to be captured.
Worked Example (Indicative)
An engineering SaaS company employs eight software engineers in the year to 31 March 2026. Annual gross salaries total £640,000. Employer NIC (at the 15% rate effective from April 2025) is £89,550 after allowances. Employer pension contributions total £32,000. Total payroll cost for the engineering team: £761,550.
The company runs contemporaneous Jira tagging. Over the year, 72% of engineering hours were logged against qualifying R&D projects (feature R&D tackling genuine technical uncertainty), with the balance on production support, routine maintenance, and training.
Claimable staffing cost: £761,550 x 72% = £548,316.
Under the merged scheme at the 20% credit rate, this contributes £109,663 of gross credit. After corporation tax at 25%, the net benefit to the profitable company is approximately £82,247 (15p per pound of qualifying spend). If the company were loss-making and met the 30% R&D intensity threshold for ERIS, the 27% rate would apply instead. Figures are indicative and will vary with actual facts.
Evidence Checklist
- Payroll report showing gross salary, employer NIC, and employer pension for each relevant employee across the claim period.
- Apportionment schedule showing percentage of time on qualifying R&D for each employee, with methodology noted.
- Underlying evidence for each percentage: timesheets, Jira exports, project board snapshots, or interview notes.
- Written role descriptions showing that each employee is directly and actively engaged in qualifying R&D activity.
- Reconciliation between the payroll report and the financial statements for the period.
Directors, Owners, and Share-Based Remuneration
Owner-managed businesses frequently pay directors a mix of modest salary and larger dividends. The staffing cost rules are blunt here: only the salary element, processed through PAYE, is claimable. Dividends, loan drawings, and distributions are not staff costs and contribute nothing to the R&D claim.
For companies where the technical founder-director is genuinely a lead contributor to R&D activity, the claim value can be meaningfully improved by restructuring remuneration so that a larger share of the founder's pay is processed through PAYE. This is a corporation tax and income tax optimisation question and falls outside our introducer service. A specialist adviser or tax consultant will model the trade-off.
Share-based remuneration introduces further complexity. EMI option exercises that go through PAYE at market value are generally claimable on the PAYE-processed amount in the year of exercise. Unapproved options settled outside PAYE are typically not claimable. Restricted stock units vesting under PAYE are claimable on the vesting amount. The detail here is material for scaling companies and warrants an early specialist conversation.
Pensions and Salary Sacrifice
Pension salary-sacrifice arrangements are increasingly common. Under a typical arrangement, the employee gives up a portion of salary in exchange for an increased employer pension contribution. Both components of the sacrificed amount form part of the claimable base.
A practical example: an engineer contracted on £60,000 salary with a 5% employer pension contribution (£3,000) elects to sacrifice £5,000 into an additional employer pension contribution. The payroll position becomes: £55,000 salary, £8,000 employer pension. Both are claimable staffing cost for the apportioned R&D fraction. The claim base is unchanged by the sacrifice arrangement; what changes is the split between categories within the claim.
Defined-benefit schemes require careful handling. The employer contribution rate attributable to each employee may be derived from actuarial calculations rather than a simple percentage. The claim should use the same rate as appears in the statutory pension disclosures.
Holiday, Sick, and Parental Pay
Holiday pay, sick pay, and statutory parental pay that forms part of the employee's PAYE earnings is included in the claimable base at the R&D-apportioned percentage for the period. The logic is that these costs are unavoidable components of employment; a company engaging an R&D engineer pays for 52 weeks of the year even though the engineer may only be working productively for 44 of them.
The mechanical effect is that the R&D percentage applies to the annual gross pay including paid absences. A 75% R&D apportionment on a £60,000 salary produces a £45,000 claimable figure, regardless of how many days were taken as annual leave. This is conceptually cleaner than attempting to allocate leave days between R&D and non-R&D use.
Supervisory, Support, and Indirect Staff
The BIS Guidelines recognise that R&D activity often requires supporting work that is not itself directly engaged in resolving scientific or technological uncertainty. Paragraph 31 of the Guidelines covers qualifying indirect activities, which include scientific and technical information services to support the R&D (for example, preparing internal reports of R&D results), indirect supporting activities such as maintenance of equipment used in the R&D, security, administration and clerical support, training required to directly support the R&D, and research activities relating to the practical implementation of the results.
The salary cost of staff performing these qualifying indirect activities is claimable in the same way as cost for staff directly engaged. The apportionment tends to be lower, because qualifying indirect activity generally makes up a smaller share of the individual's role, but the principle is the same.
Examples of qualifying indirect staff in a typical software claim include a technical writer producing internal R&D documentation, an IT administrator maintaining the development infrastructure used by the R&D team, and a lab manager responsible for experimental environments. General HR, finance, and facilities work remains outside the rules.
Building a Sustainable Record-Keeping Practice
Companies that intend to claim year after year benefit from putting lightweight time-tracking in place rather than reconstructing percentages at each year-end. Four low-friction approaches produce solid evidence without burdening the engineering team.
Project-code tagging in Jira or equivalent. Add an "R&D" epic or label and require engineers to assign every ticket accordingly. Monthly exports produce the time split automatically.
Percentage confirmations at each quarter end. A short survey sent to each technical staff member asking them to confirm their R&D percentage for the quarter, backed by a sampled review from the technical lead. Takes 15 minutes per person per quarter.
Calendar analytics. For engineering-heavy teams, calendar exports can be analysed to separate R&D-project meetings from production-support meetings. Less precise than timesheets, but surprisingly effective when combined with the underlying Jira tags.
Sprint-goal tracking. Each sprint has an R&D or non-R&D designation (or a percentage split). Sprint records feed directly into the claim evidence pack. This works particularly well for scrum-run teams.
None of these approaches is required by statute. All of them reduce enquiry risk and make the annual claim less demanding on the finance team.
Related Cost Categories
Staffing costs interact with several other headings in a typical claim.
- Externally provided workers — for agency and contract staff under the claimant's direction.
- Subcontractors — for third parties delivering outcome-based R&D work.
- Software — for tools used by the claimed R&D staff.
For the full framework, see the Eligible Expenses pillar guide.