The term furlough refers to a temporary leave of absence. Under the current economic and employment situation, a large number of employees in the UK have been furloughed. The UK Furlough Scheme is providing fixed wages to the employees who would have otherwise been unemployed.
What is the Furlough Scheme, and How Does it Work Now?
The UK Furlough Scheme is the government’s response to the economic damage caused by the coronavirus pandemic and its financial implications. The furlough scheme was launched on April 20, 2020, and aimed to reduce unemployment and related costs. The UK Furlough Scheme comprises of Coronavirus Job Retention Scheme (CJRS) and Self-Employment Income Support Scheme (SEISS).
While Coronavirus Job Retention Scheme focuses on paying the wages of employees who would have been laid off otherwise, the SEISS comes in the form of grants to self-employed individuals whose businesses have been adversely affected by COVID-19. To be eligible for grants under the SEISS, you must earn over 50% of your total income from self-employment, and your average annual profit must be less than £50,000. The individuals must have been self-employed from before April 6, 2019, and must have filed tax returns for the financial year 2018-19. The amount of grant will be based on the average of tax returns for the past three tax years.
For applications to the CJRS, the employers must have started a CJRS scheme before March 19, 2020, and should be enrolled for CJRS online. All employees, whether part-time, full-time, flexible, agency or zero-hour contracts, can be put on furlough. The coverage of the UK Furlough Scheme varies from town to town, depending on the percentage of employees furloughed. For instance, the maximum coverage is in the cities of Crawley, Burnley, Slough, Sunderland, and Birmingham, with the largest number of employees sent home by their employers. Crawley reported 33.7% of the employees furloughed in May 2020, while Cambridge reported 17.4% of the employees furloughed in the same period, being one of the least affected cities.
The employers and self-employed individuals are utilising the UK Furlough Scheme optimally. According to data released by the government, over one million firms were using the job retention scheme in May 2020 wherein the wages of 8.4 million workers have been covered. On the other hand, the self-employed income support scheme received 2.3 million claims for over £6.8 billion in income support. The construction industry has been the most affected and had the highest number of claims under the SEISS. The government has paid out a total of £1.76 billion to 680,000 construction employees who were furloughed due to the pandemic. The companies that have used the schemes include Costain, Morgan Sindall, and Wates, among others.
Updates on the Scheme and How is it Changing
The UK Furlough Scheme was launched on April 20, 2020, and planned to cover the wages for March, April, and May. The furlough scheme was later extended to cover the month of June and has now been announced to run until October 2020. Under the Coronavirus Job Retention Scheme, the government pays 80% of the furloughed employees’ wages to the employer, up to £2,500 per month, in addition to the national insurance and pension contributions.
For the months of June and July, the government will continue to pay the same and employers will not be required to pay anything; however, the employers will need to bear the national insurance and pension payments from August 2020 onwards. For September, the state will pay 70% of the employees’ wages and the employer will be required to take care of the remaining 10% and the insurance and pension payments, while in October 2020, the state will pay 60% and the employer will pay the remaining 20% of the wages.
Similarly, for the SEISS, the government currently pays 80% of the average monthly trading profits, paid out for three months together, capped at £7,500 in total. After the extension of the scheme in May 2020, the government will pay 70% of the average monthly trading profits, capped at a maximum of £6,750.
Benefits of the UK Furlough Scheme
The UK Furlough Scheme has proved to benefit the workers, employers, government and the economy on the whole. The scheme has helped to keep the unemployment rates low and avoid the financial and emotional costs associated with laying off and rehiring employees. Thus, the scheme has limited the damages caused by the pandemic and kept the money flowing in the economy.
Additionally, the advance notice about the furlough prepared people to save up the amount of money they would lose by reducing their expenses. The money saved can then be invested in general investment accounts, money market funds and short-term CDs to generate additional income. The returns on the investment will make up for the lost income.
How Does the Furlough Scheme Affect Pension?
The government has made it clear that furloughed payments are pensionable. The employers can claim the pension contributions made for the furloughed employees; however, the amount is capped at the minimum automatic enrolment contributions equating to 3% of the qualified earnings. For employers making additional pension contributions over and above the minimum, only the minimum amount can be reclaimed from the government.
Moreover, if the employer elects to top up the salary of their employees beyond the 80% offered by the state under the UK Furlough Scheme, the total salary is pensionable. The additional costs related to the top-up wages paid by the employer need to be borne by the employer itself. For the self-employed individuals, it is advisable to continue making payments towards their personal pension schemes or SIPPs every month so that they can sail through the difficult financial times later and also save on taxes.
What is the cost of the Scheme to the UK Government?
The UK Furlough Scheme is currently supporting about 7.5 million jobs. As a result, by June 2020, the government has already spent over £20.8 billion on the Job Retention scheme. The cost is expected to reach £80 billion by the end of October 2020. Furthermore, 70% of the individuals eligible under the SEISS have made a claim, for a total cost of £9 billion to the UK government.
Problems with the Scheme
The UK Furlough Scheme is proving to be highly beneficial for individuals and employers. However, the scheme is very expensive for the government and is costing about £8 billion a month. The generous nature of the scheme can pose potential problems for the economy as it may deter the transition of the economy to recovery. The scheme cannot keep on supporting the jobs that will not remain viable in the post-COVID economy and will only delay the restructuring of the businesses. Despite the high costs associated with the UK Furlough Scheme, it has been a saviour for the UK economy and its workers. The scheme has helped to avoid a surge in unemployment and saved many workers from layoffs. The hold on economic activities and the associated damages would rather be more temporary than permanent, owing to the scheme, as the workers will be able to go back to their businesses and the economy will bounce back sooner than later.