Covid-19: 80% rule salary payments liable for income tax and NICs

Individuals will be deducted income tax and national insurance contributions (NICs) on the 80% salary subsidies paid under covid-19 emergency employment measures for furloughed workers

Under the Coronavirus Job Retention Scheme all UK employers will be able to access support to continue paying part of their employees’ salary for employees that would otherwise have been laid off during this crisis, although it is still not clear how payments for zero hours workers will be calculated.

Indications are that contract worker compensatory pay will be calculated based on an average reference period to be confirmed.

HMRC has confirmed that ‘individuals will pay income tax and national insurance contributions (NICs) on any payments received through this scheme as they are replacement for income in line with normal practice for benefits or grants that replace income’.

The scheme will be in place for three months, and will be backdated to 1 March 2020, running for an initial three months, subject to review, through to 31 May.

Guidance is rapidly being developed by HMRC following the Chancellor’s announcement last Friday [20 March] on a raft of emergency covid-19 employment measures.

The three-month period straddles two tax years, with the new tax year due to start on 6 April 2020, raising further complications for taxpayers reporting under self assessment, but that is for the future.

There is still limited information on the scope of the measures with HMRC technocrats working night and day to develop detailed technical guidance for tax advisers and businesses.

Unlike normal circumstances, draft legislation has not been put out to consultation as the covid-19 crisis has forced the government to move so quickly to take ‘unprecedented action’.

According to HMRC sources, ‘HMRC is working night and day to get the scheme up and running and we expect the first grants to be paid within weeks – and we’re aiming to get it done before the end of April. Existing systems are not set up to facilitate payments to employers’.

Payments are likely to be made as grants by HMRC and will be taxed at source, ie, directly by the tax authority/government.

The tax authority said it would confirm in due course whether employer NICs would be payable on these grants, and how flexible they would be.

HMRC is working to produce detailed guidance but there are still many questions about the policy.

Employers have questioned how the 80% subsidy will work in practice, from tax liability for income tax and NICs to eligibility criteria, for example does it extend to company directors, employee with shares and zero hours contractors who work an average fixed number of hours a month, but are on a flexible contract.

There are also questions about whether companies will be able to split the grants between staff to ensure the business continued to run, while maintaining a level of fairness, particularly in key services like nurseries and doctors’ surgeries, for example.

What about self employed and gig workers?

Concerns also abound about the position of the UK’s estimated five million self employed people, including gig workers, who have are not covered by the current furlough 80% rules. This crisis also rekindles the unresolved issue of the definition of a worker and employee, highlighted by the rise of the gig economy.

Commenting on Tuesday, Neil Carberry, chief executive of the Recruitment and Employment Confederation, said: ‘We are talking to the BEIS about the guidance on the Job Retention Scheme… [it is] not yet finalised but hoping to see it today or tomorrow.’

Some experts are suggesting that it may have been better to put people on a universal basic income (UBI) baseline of, say, £1,000 a month, particularly if the covid-19 crisis were to continue for a sustained period, or change tax thresholds for those on reduced hours. All options would be expensive but there would be more fairness across society.

Paying UBI of £1,000 per month, for example, to every UK resident would cost the government around £800bn per year.

The 80% subsidy could cost up to £4bn a month to run depending on the scale of take-up, based on the £2,500 cap.

The Institute for Fiscal Studies has warned: ‘There are some wrinkles in the policy. Depending on the details it might turn out to be extremely generous to those who work for their own companies.

‘Some employers might find it frustrating that it rewards them for having half of their workforce not working at all when they would much rather have all of their workforce working half-time.’