A new apprenticeship levy from April 2017: What employers need to know and do

Written on 6 Mar 2017

The government pushes forward its apprenticeship agenda under a “use it or lose it” policy

From April 2017 the way the government funds apprenticeships is changing through the introduction of a monthly levy. Depending on the size of their employee pay bill, all employers operating in the UK may be caught. With these levy arrangements also comes a new system for all employers, not just those caught by the levy, to access apprenticeships.

How is the levy calculated?

The levy is calculated at 0.5% of an employer’s pay bill. Pay bill is the total earnings subject to secondary Class 1 National Insurance Contributions (including for these purposes earnings below the secondary threshold).  However, an annual government allowance of £15,000, for an employer to set against the levy, means that in practice the levy will only end up as a cost for those employers whose total annual pay bill exceeds £3 million per year.

Group companies which are connected employers for the purposes of the levy rules will only be able to share one £15,000 allowance between them, to set against any levy payments otherwise due from them individually. It will be for the group companies to determine how the levy allowance is apportioned between them, subject to rules set out in the applicable legislation.

Do all employers have to pay?

The short answer is yes, provided the pay bill is over the £3 million threshold set out above.  There is no opt-out – the levy applies regardless of:

  • the sector an employer operates in;
  • the number of individuals employed; and
  • whether or not the employer has engaged apprentices in the past.

Employers that contribute to an existing levy scheme or other collective training scheme will still be required to pay the levy.  The government has stated the relevant Industry Training Boards for the construction, engineering and film industries will consult their members on potential changes to their existing levy arrangements.

Employers should note that the Finance Act 2016 also includes proposed specific anti-avoidance measures.

How is the levy paid?  And to whom?

The levy will be payable monthly to HMRC, through the Pay as You Earn (PAYE) system along with an employer’s income tax and national insurance contributions. The government’s £15,000 allowance, to set against the levy, also accumulates monthly (at the rate of £1,250 a month). Any part of the allowance which is unused in a month is carried over and added to the allowance for the next month in that tax year.

Pay-back by taking on apprentices

The levy is being introduced to help fund, and encourage employers to take on, high quality apprenticeships which the government sees as crucial for raising UK productivity and staying globally competitive.  The government has committed to 3 million additional apprenticeships being created in England by 2020.

England, Wales, Scotland or Northern Ireland – it makes a difference

As Skills is a devolved policy area, different approaches to using the levy to fund apprenticeships may be taken in England, Wales, Scotland and Northern Ireland.

In England, a standards based approach is being adopted – a group of “trailblazer” employers are developing over 350 clearer and more concise standards, which will be approved by a new independent body, the Institute of Apprenticeships.

And to encourage employers to take on apprentices under these new standards, employers who have paid the levy will get back the “English” part of their levy as “e-vouchers” which they can spend, via a new Digital Apprenticeship Service (DAS), on approved apprenticeship programmes for their business. Under current proposals the English part of their levy will be determined using the domestic addresses of the current workforce.

The government is liaising with the devolved administrations in Wales, Scotland and Northern Ireland, over their proposed arrangements for giving employers access to levy funding for apprenticeships.

A 10% top up

To encourage employers to use their e-vouchers under the English scheme, the government has promised a 10% government funded top-up to their levy payments for employers to spend on apprenticeship training in England, meaning that they really can potentially get out more from than levy than they put in.

“Use it or lose it”

If employers don’t use their levy contributions, or the government top-up, they are lost; the lost funds become available for another employer to take advantage of.  There is therefore a real incentive for employers to tackle their approach to apprenticeships now.

What should employers be doing now?

Steps that employers should be taking in preparation for the levy include:

  • Speak to your payroll provider to confirm the amount of your pay bill and how any levy will be paid.
  • Ascertain what will be the cost of the apprenticeship levy to your organisation?  How much will you have to pay under the levy? What levy funds will you use?  Will funding apprenticeships impact on any internal training programmes?
  • Calculate what proportion of your levy you will have available to spend on apprenticeships in England via DAS.  Remember to take into account the 10% government top-up (as well as the National Insurance Contribution savings that came into force in April 2016). Keep a watch out for developments in Wales, Scotland and Northern Ireland. Remember, the levy cannot be used to pay salaries or other staff costs – it can only be used to pay for approved training and assessment.
  • Review workforce arrangements.  Are any vacancies suitable to be met through apprenticeships?  Could any existing staff benefit?  Under the new system, apprenticeships will be available up to the highest level and for individuals of any age – but care must be taken to ensure that any move to an apprenticeship is appropriate.  Note that under the current rules the levy will not be able to be used to pay for any existing apprenticeships.
  • Set up an account with DAS.  Access information regarding apprenticeship standards and providers and advertise any vacancies. 
  • If there are no apprenticeship standards that meet your organisation’s needs, consider approaching the Institute of Apprenticeships and become involved in the development of new standards that are relevant to your business. Consider whether it would be appropriate for your organisation to become an approved training provider, enabling levy funds to be used for training apprentices in-house. 
  • From 2018 employers will be able to divert their vouchers to a third party in their supply chain. Employers who are not using their levy in full should consider carefully how they can share their entitlement.

Employers who do not pay the levy (as the government allowance off-sets the whole of their levy liability) will, in England, still be able to access the new Digital Apprenticeship Service, which will provide online support and guidance to enable them to manage their apprenticeship programmes and source relevant training. The government has indicated that ultimately these employers will be able to access unused funds from levy paying employers to finance their own apprenticeships, (although initially funding will still be provided directly to smaller employers from HM Treasury).

In the meantime, for more information click here for the infographic to the apprenticeship levy or speak to your usual OC contact.