Understanding the apprenticeship levy

Published: 19 Feb 2016

Understanding the apprenticeship levy

The UK Government will start collecting an apprenticeship levy in April 2017. Employers will pay the levy at a rate of 0.5% of payroll from the point where their payroll exceeds £3 million.

The levy  - for and against

The levy has attracted some criticism from those who dislike the costs for business and describe it as a "payroll tax". Business criticism of the levy often groups it with other government policies which increase business costs, for example the higher national minimum wage and the immigration skills charge. It sometimes seem as if the levy is the easiest of these policies to attack.

The case for the levy is that it will help reverse a 20 year decline in employer spending on training, will be more effective than voluntary initiatives in that period and will, as a result, secure benefits for individuals and employers. The levy is part of a larger set of reforms designed to narrow the 20% productivity gap between the UK and other advanced countries

How the levy will work

The official guide for employers is available here and will be supplemented in July with more information.

The diagram at the top of this page outlines the key information and financial flows in the new levy system that will take effect from April 2017.

HMRC will begin to collect levy payments on a monthly basis from the April 2017 payroll onwards. The rules about who will pay are already set out in the Enterprise Act 2016 and include provisions to identify connected companies when deciding which organisations are exempt from payment. HMRC will piggyback levy collection on existing business payroll tax systems so this part of the operation is likely to be relatively straightforward.

Employer control of apprenticeship training funds is a key principle of the new system though control will only mean receiving cash payments if the employer is also a registered training organisation. The government's Skills Funding Agency will be publishing information shortly on the apprenticeship training register. There will be tests on financial viability and capability to act properly. Registered organisations will have to show that they can train apprentices and provide accurate information back to government (necessary to trigger payments).

The Digital Apprenticeship Service will be the route by which employers direct the use of funds whether they act as training organisations or not. Employers will get an account which will record the amount they have paid via the levy plus a 10% top-up. This is the amount that they will be able to use in purchasing training from registered organisations. Funds in the account need to be spent within 18 months or will be removed. Given that money will be added each month, managing the balance will not be straightforward. The government's expectation is that employers will negotiate a price for training each apprentice with the registered organisation. A maximum price will be set for each apprenticeship standard (though the amounts are not yet known). Employers may secure additional funds for the training of 16-18 year old apprentices (again the details are not yet known). Payments for each training will be made in monthly instalments depending on the expected training duration. The minimum length for training is 12 months.  

A longer briefing note and some presentation slides on the levy are available below: