The Apprenticeship Levy Explained: How it Works and Who it Affects

April 13, 2017 Apprenticeship Levy

In April, a new levy on businesses aimed at boosting apprenticeship funding comes into force in the UK.

The Apprenticeship Levy is a new tax on businesses calculated and collected as part of the PAYE system. It is being introduced with the aim of funding three million new apprenticeships by 2020 and will be charged regardless of whether or not a company already runs an apprenticeship scheme.

First payments are due to be taken in May 2017.

The levy is calculated at 0.5 per cent of a company’s wage bill. However, there is an offset allowance of £15,000, so in practice this means it is only applicable to businesses and organisations with an annual payroll of more than £3 million. That is less than 2 per cent of UK companies.

Public sector organisations are liable for the levy alongside private corporations.

Making Payments

The levy has been added to the existing PAYE system in order to make administration for businesses and HMRC as straightforward as possible. Government guidance states:

Employers will pay and report Levy payments through their normal payroll processes, using PAYE real time information (RTI). The Apprenticeship Levy will also operate on the basis of known definitions which employers will already use in relation to National Insurance contributions… The policy intention is that they will calculate and pay the levy on a monthly basis.

Recovering Payment

The levy has been set up to create a national funding resource available to any organisation which runs a new apprenticeship scheme. This means that companies liable for the payment will be able to recover the costs back into their own business by offering apprenticeships.

This will only apply to new apprenticeship schemes, so you cannot recover costs on apprentices you already employ. So in practice recovering the levy will require working with training providers to design and implement new programmes in line with current standards and frameworks.

Each apprenticeship will fall into a funding band allocated by the Department for Education and the Funding Skills Agency. This is based on a forecast of expected running costs and projected economic value of the scheme. These funding bands determine the maximum amount a company can recover from the levy fund per apprenticeship.

There are 15 bands in all, with maximum recovery values ranging from £1500 to £27,000.

Recovery has to be offset against the length of time an apprenticeship takes to complete, which is typically two to three years. For example, a company with a wage bill of £5m can expect to pay £10k per year (0.5 per cent on the £2m liable). This adds up to between £20k and £30k over the span of an apprenticeship scheme, so to offset the levy completely, that company be looking at employing upwards of 15 apprentices at Band 1, or just one apprentice at Band 15.

Of course, the intention is that the levy will act as a spur for companies to revamp their employment and training, and that delivering apprenticeships will offer far greater value in terms of better skills and talent retention than merely recovering the tax paid.

A number of service providers have cropped up offering ‘Blueprint’ recovery pathway services to organisations affected by the levy, combining bespoke apprenticeship programme design with levy payment and offset management.