Covid-19, Furlough and your Tax Code
09th June 2020
The furlough scheme introduced by Chancellor Rishi Sunak earlier this year has bought some critical breathing space for an incredible number of UK workers and businesses. It’s an almost literal life-saver at a time when massive sections of the economy have been ground to a standstill by the global crisis.
Of course, we’re not talking about free money here. The government may be paying a big chunk of your wages right now, but it’s all still taxable income. That means your tax code will still determine how much of that pay you lose each month. Depending on your personal situation, this could lead to you paying the wrong amount of tax for the year.
Could my tax be wrong if I was furloughed?
It all comes down to how the PAYE system works. When your tax payments are calculated, they’re based on the assumption that you’ll be earning a constant amount each month. However, the Coronavirus Job Retention Scheme (CJRS) has seen a lot of us losing 20% of our income while on furlough. Obviously, if your employer’s making up that missing 20% then there’s no real problem since your total income won’t have changed.
Not everyone’s in that position, though. For some, it’s possible that the CJRS system will have actually seen their income drop below the higher rate tax band. There’s been a hard cap placed on monthly payments through the scheme, set at £2,500. This means that people whose normal salaries are £37,500 or above will actually be getting less than 80% of their standard pay. On the other hand, workers on lower pay could actually see their income drop below the tax-free Personal Allowance level of £12,500 over the year.
Could I owe more tax if I have made other income while furloughed?
It’s actually possible that the COVID-19 pandemic could see people suddenly owing more tax than they’ve paid through PAYE. This can happen if they took up the opportunity to take on other work while on furlough. The CJRS rules allow for this, but any additional income you’re making is still taxable as normal.
In some cases, this could bump people into a higher tax bracket or change the types of tax allowances they qualify for. The same can happen for people who start making extra money on the side through self-employment. Even selling things on eBay or Etsy can count toward the tax you owe, as long as you’re making over £1,000 a year doing it.
Could my tax code change because I was furloughed?
Either way, whether your total income has gone up or down overall, there’s a good chance your tax code no longer works as an accurate measure of the tax you owe (or are owed back). For people who become unemployed after having been put on the scheme, for instance, the tax they’ve already paid will be too high. Their code assumed they’d keep earning at the same level throughout the tax year, but their circumstances have changed violently since that calculation was made.
What is the impact of Covid-19 on tax for self-employed people?
It’s not only people employed through PAYE who’ve been affected by the COVID-19 crisis, either. Many self-employed people have been able to get financial help in the form of the Self Employment Income Support Scheme (SEISS). Similarly to CJRS, SEISS has been paying out 80% of people’s average monthly earnings, again capped at £2,500 per month. This money hasn’t been taxed at source like it has for PAYE earners. However, it still needs to be reported as taxable income through the Self Assessment Tax Return system.
When will the furlough scheme end?
Both the CJRS and SEISS schemes will be tailing off over the coming months, which will change things again for anyone affected by them. There’s already been a fair amount of confusion over where this all leaves people, and the tax code rules are notoriously tricky and easy to fall foul of.
Always remember that tax code issues are exactly the kind of things RIFT is here to help with. If you’re at all unsure of where you stand, get in touch and we’ll make sure your code matches your circumstances. If there’s a problem, we’ll get it sorted. Working with RIFT means never having to worry about HMRC getting its wires crossed, so call or email to get the UK’s leading tax experts on your team.