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The Apprenticeship Levy Explained

6th April 2017 will see changes to the way the government funds apprenticeships in England. George Osborne announced in his Autumn Statement in November 2015, as Chancellor at that time, a target of achieving 3 million ‘high quality’ apprenticeships by 2020. This will obviously cost money and Mr Osborne has placed the responsibility for funding this on UK businesses via an apprenticeship levy. He hopes this levy will raise £3bn a year.

The government decided action in this area was necessary as found that there has been a steady decline in the amount and quality of training offered by employers over the last 20 years and this has had a negative knock-on effect on UK productivity. The levy is hoped to reverse this trend and increase the quality of apprenticeships so they are considered a worthwhile alternative to university. It is additionally hoped that they will assist in remedying the worsening skill gaps in the UK workforce.

A new independent employer-led body will come into operation in April 2017 also – the Institute for Apprenticeships – with the task of setting apprenticeship standards and ensuring quality. The body will also advise on the level of levy funding each apprenticeship should receive.

How much is the levy?

From April 2017, employers with a wage bill of more than £3m per annum will be required to pay the sum equivalent to 0.5% of their wage bill as a levy to fund apprenticeships. This levy should be paid to HMRC through the PAYE process. If an employer’s wage bill is less than £3m each year, they will not pay any levy.

The wage sums that will be the basis on which the levy will be calculated are the total amount of employee earnings subject to Class 1 secondary National Insurance Contributions (NICs). Although earnings below the secondary threshold are not counted when calculating an employer’s NICs, they will be included for the purposes of the levy calculation. The earnings will include any remuneration directly derived from employment; wages, bonuses, commissions and pension contributions. The levy will not be charged on other payments such as benefits in kind.

If employers do have a wage bill in excess of £3m per annum, they will have an allowance of £15k per year to offset against this levy (note the levy is only payable on pay bills over £3m because 0.5% x £3m = £15k, being the level of levy allowance). The levy allowance must be used to fund apprenticeship training and assessment and not to pay apprentices’ wages.

The levy payable will be different for all employers as the amount due will be 0.5% of their wage bill:

Example 1

An employer with an annual wage bill of £5m:

  • Levy sum: 0.5% x £5,000,000 = £25,000
  • Subtracting levy allowance: £25,000 – £15,000 = £10,000 annual levy payment

Example 2

An employer with an annual wage bill of £12m:

  • Levy sum: 0.5% x £12,000,000 = £60,000
  • Subtracting levy allowance: £60,000 – £15,000 = £45,000 annual levy payment

Example 3

An employer with an annual wage bill of £2.2m:

  • Levy sum: 0.5% x £2,200,00 = £11,000
  • Allowance: £11,000 – £15,000 = – £4,000

No levy is payable.

How can employers utilise the £15k levy allowance?

The £15k levy allowance is intended to fund apprenticeship training and assessment, as directed by the employer. As such, organisations will not receive the £15k levy allowance in cash; it will be paid in vouchers. The government will create an online portal known as the Digital Apprenticeship Service, which all organisations will have access to. Employers can then create an account and use the portal to ‘shop’ for apprenticeships, find accredited training providers and pay for training with their digital vouchers. Employers will have 18 months from when the levy allowance monies are paid into their account to spend it, following which the vouchers will expire.

Employers who pay the levy and provide apprenticeship training will receive a government ‘top up’ of 10% into their digital service accounts. So for every £1 an employer pays in, they can draw down £1.10 to spend on apprenticeship training through their digital account.

For employers that do not pay the levy (as their wage bill is less than £3m), they will be able to access government support for apprenticeships. There will still be government funding available towards the cost of apprenticeships but they will have to contribute themselves under a system called ‘co-investment’.

There are separate arrangements for Scotland, Wales and Northern Ireland. Skills training is a devolved matter.

Opinions on the Levy Impact

The government has estimated that the apprenticeship levy will be paid by fewer than 2% of UK employers. In its policy paper introducing the draft legislation (the Finance Bill 2016), it said: “For employers paying the levy, the measure is expected to have some impact on administration costs and the impact will vary by employer, depending on the size of their paybill.” It added that there is likely to be a “near-term impact in reducing earnings growth”, but that increased productivity brought about by apprenticeship training will ultimately lead to increased profitability for businesses, and increased wages in the long term. Some believe that this levy will cause a surge in youth employment.

The Confederation of British Industry (CBI) has urged the government to have a rethink on this apprenticeship levy. They are concerned that the apprenticeship levy could impose substantial costs on employers and this be without any improvement in the training they provide. Some have raised concerns over quantity versus quality of apprenticeships under these changes, with the 3 million apprenticeships by 2020 target.

Other reported concerns include that the £3m threshold may lead to some employers considering ways of reducing their wage bill and looking to pay staff through personal services companies to move that money off PAYE systems. Some cynics also worry that the levy allowance will be used to ‘rebadge’ current workplace training as apprenticeships in order to recoup costs.

What can organisations do now in preparation?

If you believe the apprenticeship levy may affect your organisation, in preparation, you may wish to consider budgeting for paying this levy now if your pay bill is around or in excess of £3m a year. Forecasts should be made, accounting for potential pay rises that shall be made before April 2017. Keep in mind that, as of April 2016, employers are no longer liable for Class 1 NICs on apprentices.

As this is to be paid monthly via the PAYE system, the method by which this will be done should be reviewed.

Consider skill gaps or areas in your business that may benefit from an apprentice. Employers have 18 months from the date the allowance is paid into their online account to spend it so this should be diarised, with reminders, andyou’re advised to consider how the business will benefit best from investing the vouchers.

With the recent appointment of a new Cabinet following Theresa May’s appointment as Prime Minister, and the recent announcement that apprenticeships and skills will now fall under the Department for Education in the split up of BIS (Department of Business, Innovation and Skills) we’ll have to wait further clarification on outstanding matters. Further details regarding how these apprenticeship changes will work in Scotland, Wales and Northern Ireland as skills training is a devolved matter and how it will work in industries that already have levies in place, such as construction, we hope are imminently forthcoming.

If you have any questions regarding this article, please do give us a call on 01271 859 267.