Does furlough affect the amount of tax you pay and will your tax code change?

MORE than nine million Brits are expected to be furloughed due to the coronavirus crisis as businesses struggle to survive the national lockdown.

Under the scheme, the government covers 80 per cent of an employee's wages if they can't work because of the COVID-19 outbreak.

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But with a drop in salary, are you expected to still pay income tax and if so, do you pay the same amount?

Here, we take you through everything you need to know about the furlough scheme and how it affects income tax.

What is furlough?

The government launched a "Coronavirus Job Retention Scheme", which can be backdated to March 1, 2020.

It is open to all UK employers for a period of up to three months, although this has now been extended until the end of June 2020.

Simply put, if your employer is forced to close temporarily due to coronavirus, they can use a portal to claim 80 per cent of your wages.

The claim is capped at £2,500 per month for each employee, so if you usually earn a lot more than that you'll see a bigger drop in wages.

The government has asked employers to top-up payments with the remaining 20 per cent so that workers don't lose out but it's not compulsory and many companies have chosen not to.

The scheme isn't supposed to be used for short-term sickness and there is a three-week minimum furlough period.

At first, the scheme was only available to employees who were on the PAYE payroll before February 28, 2020 but this has now been extended to March 18, 2020, helping out an extra 200,000 workers. 

Do I have to pay income tax if I've been furloughed?

The main point of furlough is to make sure that staff aren't laid off if a business sees a significant drop or zero revenue during the crisis, so it's treated like a normal pay check.

This means you will have to pay income tax and national insurance contributions on the amount that you're paid.

The government grants will also cover an employer's auto-enrolment pension contributions so staff don't miss out.

The state will pay minimum contributions of 3 per cent based on the furloughed salary, as long as you continue to pay the minimum 5 per cent.

Will I pay the same amount of income tax if I'm furloughed?

What rate of tax you pay depends on your annual income and your personal allowance.

You don't have to pay tax on your personal allowance, which for the 2020/2021 tax year is set at £12,500.

This can vary between workers, depending on any other tax benefits you're entitled to.

Anything you earn between £12,501 and £50,000 is taxed on the basic rate, which is 20 per cent.

Earnings between £50,0001 and £150,000 are subject to 40 per cent tax, while anything over that amount is subject to 45 per cent tax.

"If you have been furloughed your pay will be subject to the usual income tax and national insurance," explained Maree Firmin, Director of accountancy firm Firmin and Associates Ltd.

"Usually, for salaried workers paid through PAYE, your personal allowance and tax thresholds are divided by 12 which means your take home pay during the tax year is the same each month, providing your circumstances, like your tax code or benefits in kind, don't change.

"Therefore, if your furlough income is less than your normal monthly salary you would expect to pay less tax."

Once you are taken off furlough and your wages rise again, you'll be taxed at your usual rate.

Your tax code will stay the same even if being on furlough takes you below a tax threshold, HMRC explained to The Sun.

This will only change if where your income comes from changes, for example you take on a second job.

What if I'm a higher rate tax payer?

High-rate tax payers who are furloughed may see their wages drop into a lower tax band, so they will pay less income tax that month - this will only apply to a small number of workers.

For example, let's say that you're a higher-rate taxpayer and you earn £60,000 a year and you have the standard personal allowance of £12,500 a year.

The first £12,500 is tax-free. You pay 20 per cent tax on anything you earn between £12,501 and £49,999, so in this case £37,498.

You pay 40 per cent tax on the remaining £10,000 (between £50,000 and £60,000).

This is then divided over 12 months to work out your monthly pay, which in this case before tax is £5,000.

£3,958.33 of it is subject to tax - you pay £625 at a rate of 20 per cent and £333.33 at a rate of 40 per cent.

So your take home pay after tax is £3,620.

If your wages drop to 80 per cent for the month that you've been furloughed then your gross take home pay will be £4,000.

Your tax is then adjusted to the amount you earn. Only £2,9658.33 is taxable, so you'll pay £591.67 at a rate of 20 per cent.

You won't be earning enough to hit the 40 per cent threshold that month.

But once your wages return to normal then you will resume paying the higher rate.

What about low-earners?

Lower paid earners may see the amount of tax they pay in a month that they've been furloughed reduced to zero.

This is because being paid 80 per cent of their salary may bring them under their personal allowance threshold.

For example, if you earn £15,000 a year before tax your usual monthly pay is take home pay £1,250.

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Out of that, £208.33 is taxable and so you pay £41.67 in income tax.

But if you've been furloughed and only earning 80 per cent of your salary, your monthly pay drops to £1,000 none of which is subject to income tax.

You will still have to pay national insurance contributions though of £25 on that amount.