Investment zones: What’s next for payroll?by
Since investment zones were first introduced in September 2022 there has been limited information available on how they would be implemented. Now that HMRC has released further details, Meena Salhan looks at what this means for payroll.
The first time we heard about investment zones was in the notorious September 2022 growth plan, delivered by the Chancellor of the Exchequer at the time, Kwasi Kwarteng. The introduction of these zones, which include Greater Manchester, Liverpool (above) and Tees Valley, formed part of the government’s commitment to levelling up and would see work carried out with local councils and devolved administrations to boost productivity and growth.
When the current Chancellor, Jeremy Hunt, presented his first spring budget on 15 March 2023, there were documents in the famous burgundy briefcase about the future of investment zones. It was confirmed at this point that 12 new investment zones would be launched across the UK. Importantly for payroll and tax professionals, it was also announced that there would be certain employer national insurance (NI) savings and tax reliefs within those investment zones, like those available for the employment of veterans and in freeports. There was limited information available regarding how these would be implemented, however, HMRC has since released further details.
Reporting secondary NICs
So what do we know now about getting ready for April 2024? HMRC released information in August 2023 regarding reporting secondary (employer) national insurance contributions (NICs) in relation to the investment zone employer NICs relief (IZENR). A reduction in the rate of employer NICs will be available for all investment zone tax site-based businesses (in other words, employers located within a prescribed geographic area and only for employees who are working in that area, where the conditions to claim the relief are met).
Application of a zero-secondary rate of employer NICs is for new employees earning above the secondary threshold of £9,100 per annum, up to and including the investment zone upper secondary threshold (IZUST) of £25,000 per annum, which is equivalent to the existing freeport upper secondary threshold (FUST). Any balance of earnings above this upper secondary threshold will be charged at 13.8%. However, the calculation of primary class 1 NICs is unaffected. Current fiscal incentives will be available for five years.
For payroll processers, the announcement in March 2023 meant a change in the value of the employer NICs relief in investment zones. The growth plan 2022 indicated the relief would be available up to £50,270 per annum (in line with the relief for employment of veterans), however, it has now been confirmed as £25,000 per annum.
The eligibility criteria for employers based in Great Britain are as follows:
- they must have business premises in the investment zone tax site
- the employee must be a new hire whose employment starts on or after 6 April 2022 and before the applicable sunset date, and the employee cannot have worked for that employer (or an employer connected to the employer) in the previous 24 months
- at the start of the qualifying period, the employer must reasonably expect that the employee will spend a minimum 60% of their working time in the investment zone tax site
- eligibility to claim will expire 36 months from the employee’s start date of employment
- there’s no limit on the number of employees an employer can claim for
- employers will self-assess eligibility for the relief using appropriate guidance from HMRC
- in respect of off-payroll workers, the relief can be claimed by the liable secondary contributor for the eligible employee.
Details supporting investment zone employers based in Northern Ireland will be released as soon as they’re available.
To the letter
What about payroll software? So, let’s cover the new NI category letters to be released. Four new investment zone NI category letters will be available from 6 April 2024 to implement the NIC relief. They are NEKD:
- N - (standard category letter)
- E - (married women and widows entitled to pay reduced NICs)
- K - (employees over the state pension age)
- D - (employees who can defer paying 12% NICs and pay only 2% because they are already paying it in another job).
These new letters mirror existing NI category letters A, B, C and J, respectively. Employers can use category letters F, I, S and L for employees who work in a freeport.
For the payroll geeks out there, it may be useful to know that HMRC has recycled the NI letters E, K and D. These were previously used for employees in a contracted-out workplace pension scheme or for female employees who were eligible to pay less NI.
In the event an investment zone tax site becomes operational before 6 April 2024, employers will be able to claim the relief using the existing freeport NI letters instead. This is a temporary arrangement until the investment zone NI letters become available. All investment zone employer NICs relief claims made from 6 April 2024 onwards (including if the employer has made a claim in relation to the employee prior to 6 April 2024) must be made using the NI letters N, E, K or D. HMRC will also shortly publish the 2024/25 Real Time Information (RTI) artefacts and associated technical documents in the RTI technical pack.