The introduction of an apprenticeship levy has made a significant contribution to funding developments.
The apprenticeship landscape has changed significantly over recent years, providing greater opportunities for individuals to combine work with study to gain skills and knowledge in a controlled environment, and for businesses to benefit from recruiting and developing talent.
In this guide, we explain what the apprenticeship levy means for employers.
What is the apprenticeship levy?
Initiated by the UK government in 2017, the apprenticeship levy is a mandatory tax payable directly to HMRC for all employers paying a wage bill of more than £3 million per year. This tax can then be used by organisations to reinvest back into their business in the form of apprenticeship training, to develop the skills and knowledge of their workforce, and for any unused funds to be used for the benefit other businesses. In this way, the apprenticeship levy is helping the government to increase the quality of apprenticeships, and supports all employers in making long term and sustainable investment in workforce training.
It’s a common misconception that the apprenticeship levy can only be spent on new apprentice recruits and to develop young trainees. The tax levied on employers can in fact be spent on the entire workforce of all ages, including new and existing employees, and at all levels of seniority, from trainees through to company directors. It can also include those who already have university degree qualifications, allowing individuals to gain valuable professional qualifications that would otherwise be paid for commercially by a business.
Who has to pay the apprenticeship levy?
The apprenticeship levy applies to all employers operating in the UK with an annual pay bill of £3 million or more. This encompasses all payments to employees that are subject to employer Class 1 secondary National Insurance contributions such as wages, bonuses and commissions.
The levy also applies to companies with a payroll bill of less than £3 million a year, if connected to other companies and charities for employment allowance purposes which, when added together, have a combined pay bill of more than £3 million.
Where an employer, either with or without any connected company or charity, exceeds the £3million threshold, they will need to pay the apprenticeship levy, even if they contribute to an industry-wide training levy arrangement. Employers not connected to another employer with a pay bill below £3 million, or with a combined pay bill of less than £3 million, will not need to pay the levy. Non-levy employers will still be able to access government funding to help pay for apprenticeship training, although they will be required to make a small percentage contribution towards this cost. This is referred to as ‘co-investment’.
How much is the apprenticeship levy?
Employers that meet the £3 million criterion, either individually or when combined with connected companies or charities, are required to pay 0.5% of their annual bill each month as a levy tax. The apprenticeship levy is an annual tax charge, but employers should report and pay the relevant proportion of it monthly, alongside their other PAYE liabilities. The monthly calculation of levy liability is based on an employer’s total pay bill for the tax month.
However, all employers will have a levy allowance of £15,000 per year which can be offset against their apprenticeship levy bill. For example, an employer with a yearly pay bill of £5 million will be charged an apprenticeship levy of £10,000 (0.5% x £5,000,000 – £15,000 = £10,0000). Connected companies or charities will need to share the £15,000 allowance between them, although employers can offset an agreed proportion of that allowance. This division must be agreed with HMRC and remain unchanged for the year. The allowance must also be used within the year, where any unused allowance cannot be carried over.
An employer must report to HMRC how much apprenticeship levy they owe each month. They must report this at the start of the tax year if their annual pay bill, including connected companies or charities, in the previous tax year was in excess of £3 million or if they think their annual pay bill will be greater than £3 million. If their annual pay bill unexpectedly increases to more than the threshold, the employer must start reporting when this happens.
If the employer has started paying the apprenticeship levy, they must continue to report and pay it, even if their annual pay bill turns out to be less than £3 million. If the levy has been overpaid during the year, the employer will receive a refund as a PAYE credit.
How does the apprenticeship levy work?
Since 1 April 2021, all new apprenticeships are managed and funded using the apprenticeship service. This is the government portal run by the Education and Skills Funding Agency (ESFA), where all employers hiring apprentices will need to set up an online EFSA apprenticeship service account in which funds will be deposited for use in apprenticeship training.
Employers paying the apprenticeship levy can access the money paid to HMRC to buy training from providers who appear on the new register of training providers. Levy-paying employers can also use their online account to transfer a maximum of 25% of their unused annual funds to help other employers. For smaller non-levy employers, an EFSA apprenticeship service account can be used to reserve funding or to accept transferred funds from other employers.
All employers using the apprenticeship service account will also be required to sign a contract with EFSA, agreeing to their terms and conditions. The employer must agree to:
- only use the funding made available through their apprenticeship service account to train and assess apprentices
- have a contract with their training provider, so the provider can carry out apprenticeship training
- follow the apprenticeship funding rules.
How does apprenticeship funding work?
How much apprenticeship funding is received by an employer, and how this funding works, will depend on whether or not the employer pays the apprenticeship levy.
How an employer gets their funds and pays for training depends on whether they’re in England, Scotland, Wales or Northern Ireland. For employers paying the levy based in England, they will receive funds on a monthly basis to spend on training and assessing apprentices. The amount of apprenticeship funding that will enter their account is calculated by the levy they declare to HMRC, multiplied by the proportion of the pay bill paid to staff living in England, plus a 10% government top-up on this amount.
Funds must be used within 24 months from the date they enter the employer’s account, before being reallocated to other businesses. Any unused levy funds will be used to support new starts with non-levy paying employers, new starts with levy-paying employers who spend more than the funds available in their accounts, and existing apprenticeship learners.
If a levy-paying employer runs out of apprenticeship funds, they can trigger the non-levy route. This means that if they don’t have sufficient apprenticeship funds to pay for training and assessment, their account will automatically go into a co-investment arrangement.
For employers who are not required to pay the levy, there will always be a government co-investment arrangement. The government will pay 95% towards the cost of apprenticeship training for all new apprenticeships starting on or after 1 April 2019, up to the funding band maximum. The employer will then be required to make up the remaining 5%. If the cost of training and assessment is more than the funding band maximum, the employer will also be required to make up the difference. For apprenticeships that started before this date, these will continue at the previous co-investment rate of 10%.
Non-levy employers will need to reserve funds in the ‘finance’ section of their apprenticeship service account before starting an apprentice. From 1 April 2021, the reservation period has been extended from 3 months to 6 months, where funds can now be reserved for 6 months after the apprenticeship is planned to start, although the employer will not see the funding they have access to. The funding will be paid directly by the government to the training provider. The employer will then be required to pay their percentage contribution.
Employers will be able to make 10 new reservations to fund new apprentice starts for the financial year 2021-22, although the apprenticeship service will continually monitor the number of reservations used, and may pause reservations to ensure that the apprenticeship programme remains affordable. Funds transferred from employers who pay the levy to non-levy employers are not included when measuring the number of reservations. Smaller employers could also be eligible for extra funding, depending on the circumstances involved.
Key considerations when hiring apprentices
Under the apprenticeship funding rules, apprentices must work towards an approved apprenticeship standard, and be employed in a genuine job that gives them the opportunity to gain the technical knowledge, practical experience and wider skills they need to pass their end assessment. Their training must last for a minimum of 12 months, and at least 20% of their normal working hours must be spent on formal off-the-job training.
The employer will be responsible for providing a contract of employment and for paying their apprentice’s wage. They must pay an apprentice at least the National Minimum Wage, where the employer cannot use their apprenticeship funds to cover this cost. The employer will also be responsible for providing an apprenticeship agreement, to confirm the apprentice’s employment arrangements, and a signed commitment statement. A commitment statement, sometimes known as a training plan, is to be signed by the employer, apprentice and training provider, setting out the plan for the agreed training and how all three parties will work towards the successful completion of the apprenticeship.
Apprenticeships are managed in partnership with a training provider, and assessed by an end-point assessment organisation. To access government funding, the provider must ensure that both the individual and programme are eligible for funding by conducting an initial assessment of the individual’s abilities in line with the proposed apprenticeship, and that the training programme aligns with an approved apprenticeship standard.
Benefits of hiring apprentices
Hiring an apprentice involves a number of considerations and costs for employers, but it can pay real dividends, ensuring that staff have exactly the right skillset and knowledge to sustain and progress the employer’s business. As the UK economy continues to recover from the impact of the Covid-19 pandemic, apprenticeships will be more important than ever before in helping businesses to recruit the right people and develop the skills needed to move forward.
Apprenticeships can be used to:
- complement an employer’s existing training provision
- upskill the employer’s existing workforce
- provide greater career development opportunities
- attract future talent and support succession planning
- enhance employee satisfaction and improve retention rates
Non-levy employers, or levy-paying employers who want to invest more in apprenticeship training than is available in their accounts, now benefit from significant government funding to support their commitment to apprenticeships. In recognition of the significant value that apprenticeships can bring to UK businesses and to the wider economy, additional financial help is also available from the government in the form of:
- payments of £1,000 for other costs associated with training young apprentices
- incentive payments of £3,000 for new employees of all ages
- the small employer (5% co-investment contribution) waiver for young apprentices.
Apprenticeship levy FAQs
Do I have to pay the apprenticeship levy?
The apprenticeship levy applies to all employers with an annual pay bill of £3 million or more, or a combined pay bill of more than £3 million if connected to other companies and charities for employment allowance purposes.
How is the apprenticeship levy calculated?
The apprenticeship levy is calculated at a rate of 0.5% of an employer’s annual pay bill, although the monthly calculation of levy liability is based on the employer's total pay bill for the tax month and paid monthly.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.