A new jobs support scheme will see the Treasury top up the wages of people in “viable” jobs working at least a third of their normal hours.

Chancellor Rishi Sunak said the initiative, which replaces the furlough scheme, will be in effect for six months starting in November.

He told the House of Commons it is “fundamentally wrong” to hold people in jobs that only exist inside the furlough system.

The new jobs support scheme will see the UK Government along with employers pay up to two-thirds of the wages of people in work.

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The Treasury will provide similar support for the self-employed, the Chancellor added.

He also announced the VAT cut to 5% for businesses in tourism and hospitality will be extended until the end of March next year in targeted support for the sectors.

In addition, a new “pay as you grow” scheme will allow firms who have taken out emergency “bounce back” coronavirus loans from the government to repay them over a period of up to 10 years.

For the new jobs support scheme, the level of government grant will be calculated based on the worker’s usual salary – but it will be capped at £697.92 per month.

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People working at least a third of their usual hours will be paid for that work as normal.

Then, the state and employers will increase those wages to cover two-thirds of the pay they have lost by working reduced hours, meaning they would receive at least 77% of their usual pay.

The government will cover 22%, or up to £697.92 a month, and the employer will have to pay the remaining 55% (including the third they have already covered).

The scheme will cost the Treasury an estimated £300m a month for every million workers who take up the scheme.

Sunak said it would allow businesses to keep employees in a job on shorter hours.

It will apply to small and medium-sized firms, but larger firms will only be eligible if they have seen a fall in turnover during the crisis.

Businesses will not be able to issue redundancy notices to employees while taking part in the jobs support scheme and there will be restrictions on capital distributions to shareholders.

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Sunak told MPs: “The government will directly support the wages of people in work, giving businesses who face depressed demand the option of keeping employees in a job on shorter hours rather than making them redundant.”

The Chancellor said this latest economic intervention is built on “three principles”.

Sunak continued: “First, it will support viable jobs. To make sure of that employees must work at least a third of their normal hours and be paid for that work as normal by their employer.

“The government, together with employers, will then increase those people’s wages covering two-thirds of the pay they have lost by reducing their working hours, and the employee will keep their job.

“Second, we will target support at firms who need it the most. All small and medium-sized businesses are eligible but larger businesses only when their turnover has fallen through the crisis.

“Third, it will be open to employers across the United Kingdom, even if they have not previously used the furlough scheme.

“The scheme will run for six months starting in November and employers retaining furloughed staff on shorter hours can claim both the jobs support scheme and the jobs retention bonus.”

Sunak further announced the extension of the grant scheme for self-employed people.

An initial taxable grant will be provided to those who are currently eligible for grant and are continuing to actively trade but face reduced demand due to coronavirus.

A lump sum will cover three months’ worth of profits for the period from November to the end of January next year, worth 20% of average monthly profits – down from 80% previously – up to a total of £1875.

An additional second grant, which will be kept under review, could be available for the self-employed to cover the period from next February to April.

Explaining the need to replace furlough, the Chancellor said “we can’t save every business” and “we can’t save every job”.

He went on: “Our economy is now likely to undergo a more permanent adjustment.

“The sources of our economic growth and the kinds of jobs we create will adapt and evolve to the new normal and our plan needs to adapt and evolve in response.

“Above all, we need to face up to the trade-offs and hard choices coronavirus presents and there has been no harder choice than to end the furlough scheme.

“The furlough was the right policy at the time we introduced it – it provided immediate short-term protection for millions of jobs through a period of acute crisis.

“But as the economy re-opens it is fundamentally wrong to hold people in jobs that only exist inside the furlough.”