The second national lockdown will close pubs, restaurants and non-essential shops from Thursday until 2 December, and people will be advised to work from home if possible.
Prime minister Boris Johnson vowed to support business as he announced the new restrictions in a press conference at 10 Downing Street.
“I’m under no illusions about how difficult this will be for businesses which have already had to endure such hardship this year and I'm truly, truly sorry for that,” said Mr Johnson.
“And that's why we're going to extend the furlough system through November.
“The furlough scheme was a success in the spring, it supported people and businesses in a critical time.
“We will not end it. We will extend it further until December.”
The announcement was greeted with incredulity by Greater Manchester mayor Andy Burnham, who fought unsuccessfully to persuade the prime minister to extend 80 per cent furlough payments to workers in the city forced to down tools when it went into tier 3 restrictions.
“So why were low-paid workers in the north only worth 67%?” asked the mayor in a tweet. “The sheer injustice of it.
“When we asked you to do that for the lowest-paid people in the north, you refused. People here will remember that.”
Liverpool City Region mayor Steve Rotheram said: "Glad that the Government have finally done the right thing and maintained the 80 per cent furlough - not the 67 per cent they were offering tier 3 areas across the north.
“Now we know for sure that the Government thinks workers in the north were worth 13 per cent less than those in the south.”
The Treasury said that the extension of furlough will be UK-wide, but there was no immediate announcement on help for the self-employed.
Chancellor Rishi Sunak’s original furlough scheme paid 80 per cent of wages up to a maximum of £2,500 a month, but was gradually wound down over the summer and was due to end today. The job retention scheme supported 9.6m jobs at a total cost of £47bn.
It was due to be replaced by a less generous Job Support Scheme to replace it, worth 49 per cent of wages or 67 per cent for employees of businesses forced to close in tier 3 areas.
Labour MP Catherine McKinnell said that the extension of furlough would come too late for workers who lost their jobs as it was withdrawn this weekend.
Addressing Mr Sunak on Twitter, Ms McKinnell said: "You have said repeatedly you would not extend furlough.
“At the eleventh hour, it’s too late for businesses who have already made people redundant in anticipation of it coming to an end. People who desperately need that support now. Unforgivable."
TUC general secretary Frances O’Grady said: “The extension of the furlough scheme is long overdue and necessary, but ministers must do more to protect jobs and prevent poverty.
“Furlough pay must never fall below the national minimum wage. We need a boost to Universal Credit and government should not abandon the self-employed. And we will not control the virus unless the government fixes the test and trace system and the scandal of workers asked to self-isolate without decent sick pay.”
The director general of the Institute of Directors, Jonathan Geldart, said the decision to reinstate furlough was “absolutely the right one”, but called for grants to assist small company directors who have gone without support throughout the crisis.
British Chambers of Commerce director general Adam Marshall said the new restrictions would be a “devastating blow” to businesses, but said that the temporary extension of furlough will bring “short-term relief to many firms”.
The general secretary of the Unison union, Dave Prentis, said that councils would need support, as well as businesses and workers.
“It’s a difficult time but if everyone works together, we can slow the spread and stop hospitals being overwhelmed at this critical time," said Mr Prentis.
“That also means ministers giving councils the resources they need to play their part."