Apprenticeship levy and national living wage – a double payroll crunch for employers?

Written on 26 Nov 2015

The government confirmed its commitment in its Autumn Statement yesterday to introducing next April the new National Living Wage (NLW) and, in April 2017, an apprenticeship levy – both first announced in July’s Summer Budget. Commentators have already speculated on the impact the NLW will have on an employer’s wage bill and potentially job security, particularly in those sectors where a large number of workers are engaged but on low pay.

 Yesterday, more details emerged on the apprenticeship levy. Whilst the government has been keen to draw attention to the fact that the levy will only apply to those employers with a wage bill in excess of £3 million, the real question for those employers who meet this financial criteria will be: where will that levy come from? As the Office for Budget Responsibility (OBR) has suggested, it may well be that these costs are at least initially “ultimately… borne by employees”, “largely through lower wages” (see the OBR’s report here and executive summary here).

Whilst the levy is not due to come into force until April 2017, employee relations are central to any working environment and employers would be sensible to start considering now how they will manage any levy potentially payable and also ensure that they understand how their business may take advantage of the new proposals, so they really do “get out more than they pay in” (see the government’s consultation response here).

 So what is this apprenticeship levy?

The apprenticeship levy is a levy on businesses to help fund apprenticeship growth (the government is seeking to create three million “quality” apprenticeships by 2020) and importantly encourage companies to hire more apprentices. Hence, the government in its consultation response on how the levy will be introduced has termed it “employer owned apprenticeship training”.

One of the big economic issues the UK is currently facing is the productivity gap compared to some of our international competitors such as France and Germany. Increasing the number of apprenticeships should assist UK businesses to up-skill their workforces, which will in theory lead to increased productivity. At the time of the Summer Budget, the Federation of Small Businesses tentatively gave their support to the policy, saying “we agree with the focus on productivity but need to see the details to raise skills through the apprenticeship levy on large firms”.

More detail will be in the forthcoming Finance Bill, due to be published on 9 December 2015. In the meantime, the government in its consultation response has confirmed as follows:

  • The apprenticeship levy will come into effect in April 2017. It will be payable by employers in the UK at 0.5% of paybill.
  • All employers will receive an allowance of £15,000 to offset against payment of the levy. This effectively means that the levy will only be payable on paybill in excess of £3 million per year.
  • The levy will be payable through Pay As You Earn and will be payable alongside income tax and national insurance.
  • Each employer will receive one allowance to offset against their levy payment. There will be a connected persons rule, so employers who operate multiple payrolls will only be able to claim one allowance.
  • Paybill will be calculated based on total employee earnings in respect of all employees; it will not include other payments such as benefits in kind.

The consultation response gives two examples of how this works in practice:

Example A

Employer of 250 employees, each with a gross salary of £20,000:
Paybill: 250 x £20,000 = £5,000,000
Levy sum: 0.5% x £5,000,000 = £25,000
Allowance: £25,000 – £15,000 = £10,000 annual levy payment

Example B

Employer of 100 employees, each with a gross salary of £20,000:
Paybill: 100 x £20,000 = £2,000,000
Levy sum: 0.5% x £2,000,000 = £10,000
Allowance: £10,000 -£15,000 = £0 annual levy payment

The government’s opinion is that “a levy set and collected on this basis meets employers’ expectations that the levy will be fair and transparent. It is fair in that it shares the responsibility for paying for the apprenticeship training the economy needs across a broad base of employers and it is transparent as to who has to pay it and on what basis”.

English employers will be able to access their allocation of the levy funding collected to pay for the apprenticeship training they need which meets the required standards (for example through approved training providers) via a Digital Apprenticeship Service. The government’s proposals are that employers in England who pay the levy and are committed to apprenticeship training will be able to get out more than they pay in to the levy through a top up to their digital account.

However, all employers will be able to access support for apprenticeships, even where they do not pay the levy. The government is looking at how funds will be accessed by employers in Wales, Scotland and Northern Ireland (as this falls within the devolution plan).  Funds that are unused by employers will be “more widely available”. As part of its drive to quality the government is also establishing an “Institute for Apprenticeships”, a new independent body, led by employers, to regulate the quality of apprenticeships. More detail on this is expected over the next few weeks.

We shall provide an update on more details as they are announced. In the meantime, time will tell whether or not the government has achieved its aim of not only encouraging the growth of quality apprenticeships, the levy being an opportunity to “drive up productivity and growth for the whole economy” but also ensuring that “the levy does not place an unreasonable burden on employers”.

For further information on how this may impact your organisation, please do not hesitate to contact your usual OC Contact.