Apprenticeship levy: who pays?

Apprenticeship levy: who pays?

The apprenticeship levy equates to a relatively small monthly tax charge for large employers, but can be hugely beneficial to all businesses, providing essential funding to develop invaluable apprenticeship programmes and to boost workforce training.

However, it is important for employers to fully understand how the apprenticeship levy scheme works, to maximise their return on investment and minimise expiration. Below we examine the apprenticeship levy in more detail, from who is responsible for paying this and how this is calculated, to the duty to report and pay levy payments to HMRC. We also look at how the levy works, and what levy-paying and non-levy employers are entitled to.

What is the apprenticeship levy?

The apprenticeship levy is a type of taxation payable to HMRC by all employers with an annual wage bill in excess of £3 million. This money is retained in a levy fund which can be accessed by the employer to help pay for apprenticeship training costs. In this way, the tax is directly reinvested back into the employer’s business to develop the technical knowledge and wider skills of new recruits, along with other types of training. Any residual funds will be used for the benefit of smaller employers not liable to pay the apprenticeship levy.

The aim behind the apprenticeship levy scheme is to enhance the quality of apprenticeships and to support employers in investing in their workforce training. It means that, more than ever before, apprenticeships can be used by employers to develop valuable career pathways and attract new talent to their organisation. The levy payments made by an employer to HMRC are also a deductible expense for the purposes of corporation tax.

Who has to pay the apprenticeship levy?

All UK employers with an annual payroll bill of £3 million or more must pay the apprenticeship levy, regardless of industry sector. When assessing an employer’s pay bill, this will include payments made to employees subject to employer Class 1 secondary National Insurance Contributions (NICs), such as wages, bonuses and commissions. The payroll bill must also include payments to employees earning below the NI lower earnings limit and secondary threshold, as well as employees under 21 and apprentices under 25.

Any payments for services provided through intermediaries, such as personal service companies, partnerships or individuals subject to the off-payroll working rules, should also be included. This is because these payments are treated by HMRC as employment income and subject to Class 1 NICs, although this does not apply to payments for any services provided through intermediaries to small private sector clients or with no UK connection.

However, when assessing if an employer has met the £3 million threshold, the payroll bill must not include earnings of employees under 16 or earnings not subject to NIC legislation, or on earnings for which Class 1A NIC’s are payable, such as benefits in kind.

Companies paying less than the apprenticeship threshold in employment income may also be liable to pay the levy if they are classed as connected to other companies and charities, with a combined payroll bill of more than £3 million. Equally, even when an employer, or connected companies or charities, already contribute to an industry-wide training levy arrangement, HMRC’s levy will still fall due if they exceed the apprenticeship threshold.

For those employers whose payroll bill, or combined payroll bill, is less than £3 million, often referred to as non-levy employers, they will still be entitled to access the apprenticeship funding to help pay for training. However, they will usually need to contribute something towards this cost. This is known under the scheme as ‘co-investment’.

How much is the apprenticeship levy and how is it calculated?

For those employers liable to pay the apprenticeship levy, this will be payable on a monthly basis at a rate of 0.5% of the employer’s total payroll bill for the tax year. Even though the apprenticeship levy is an annual taxation charge, the relevant proportion of the levy must be paid monthly as part of an employer’s overall PAYE liabilities, including income tax and NICs. This means that all eligible employers will have to pay the levy at the end of every month, collected automatically by HMRC through the employer’s PAYE system.

However, an annual levy allowance of £15,000 will be given to each employer to offset against their apprenticeship levy liabilities. For example, if an employer has a yearly payroll bill of £3.5 million, they will be liable to pay an apprenticeship levy of £2,500 (0.5% x £3,500,000 – £15,000 = £2,500). The allowance must be used in full within the tax year, where any unused allowance cannot be carried over into the following year. However, if an organisation starts or stop being an employer part way through any given year, they can use the full apprenticeship levy allowance against the amount of levy that they owe.

Where connected companies or charities are liable to pay the apprenticeship levy because of their combined payroll bill, they will not each be entitled to the £15,000 levy allowance. They will instead be entitled to a single allowance and must decide how to split this.

The following formula can be used to help work out how much an employer needs to pay. For the first month of the year in question, divide the apprenticeship levy allowance by 12 and subtract this figure from 0.5% of the monthly payroll bill. For each subsequent month, work out the total payroll bill ‘and’ add up the monthly levy allowances, both for the year-to-date, then subtract the levy allowance for the year-to-date from 0.5% of the total payroll bill for the year-to-date ‘and’ subtract the amount of the levy paid in the year-to-date.

How is the apprenticeship levy paid out to employers?

All new apprenticeships are now managed and funded using the Digital Apprenticeship Service. This is an online portal run by the Education and Skills Funding Agency (ESFA), where employers will need to set up an EFSA apprenticeship online service account in which levy funds will be deposited for use in training new recruits.

Employers who pay the apprenticeship levy can access the money paid to HMRC to buy training from providers who appear on the register of training providers. For non-levy employers, an EFSA account can be used to reserve funding or accept transferred funds from other employers, where levy-paying employers can use their digital EFSA account to transfer a maximum of 25% of their unused annual levy funds each year to help other businesses. This could be, for example, to help a company in their supply chain or a local business, or by choosing businesses to support by selecting sector, skill or location criteria.

All employers with an apprenticeship service account will be required to sign a contract with EFSA, agreeing to the following terms and conditions:

• to only use funding made available through their EFSA account to train and assess apprentices
• to put in place a contract with their training provider, so that the provider can carry out apprenticeship training
• to follow the apprenticeship funding rules, for example, the levy must only be used to cover the cost of training and end-point assessments, and not to pay apprentice wages.

An employer will still be responsible for paying an apprentice for their normal working hours and any apprenticeship training, where the apprentice must be paid the appropriate minimum wage rate depending on age and the individual’s year of apprenticeship training.

How much apprenticeship levy funding can employers receive?

How much apprenticeship funding will be received by each employer, and how this funding works, will depend on whether the employer is liable to pay the apprenticeship levy.

Levy-paying employers

For levy-paying employers, funds will be received on a monthly basis to spend on training and assessing apprentices. The amount of apprenticeship funding that will enter their digital account will be calculated by the levy declared to HMRC, multiplied by the proportion of the payroll bill paid to staff living in England. These levy funds will also be topped up each month with a 10% government contribution. For example, for every £100 an employer pays into the levy fund, there will be a total of £110 in their digital account.

The apprenticeship legislation differs across the devolved nations in the UK, so the apprenticeship levy can only be used in England. For this reason, levy-funded apprenticeships must work at least 50% of their time in England, and the amount of levy that can be accessed is directly linked to the proportion of employees living in England.

Importantly, after 24 months of entering the employer’s account, any unused levy funds will expire and default back to the government, so it important that these funds are used as soon as possible. This is to incentivise regular expenditure on apprenticeship training and assessment. However, when paying for training, the government will always use the earliest funds in the employer’s account first to minimise the window for fund-expiry.

Any unused funds will be used to support apprenticeships with non-levy paying employers. Equally, if a levy-paying employer runs out of apprenticeship funds, they can trigger the non-levy route. This means that if they do not have sufficient funds to pay for training and assessment, their account will automatically go into a co-investment arrangement.

Non-levy paying employers

Under the non-levy route, employers will be required to pay 5% towards the cost of training apprentices, where the government will cover the remaining 95% through the process of co-investment, up to the funding band maximum. If the costs exceed the funding band maximum, the employer will also be required to make up the difference. If a non-levy employer employs less than 50 employees, the government will cover 100% of apprenticeship training costs up to the funding band maximum for apprentices aged 16-18, as well as care leavers and other vulnerable young adults aged between 19-24.

Non-levy employers must reserve funds in their digital account before a new apprentice starts, with a 6 month reservation period. Once a programme and training provider has been selected and a price agreed, the provider will automatically be paid monthly out of the digital account. The employer will then be required to pay their percentage contribution directly to the apprenticeship training provider under an agreed payment schedule.

Under the mandatory reservation process for non-levy funded apprenticeships, an employer can make up to 10 reservations to fund new apprentice starts. However, reservations will not be required for apprenticeships funded by transfers from levy-paying employers.

Apprenticeship levy reporting duties

Where payable, employers must report to HMRC how much apprenticeship levy they owe every month through their Employer Payment Summary (EPS). The EPS should include the amount of the annual apprenticeship levy allowance and the apprenticeship levy that is owed to date in the current tax year. Employers should also keep records of any information used to calculate their levy payment for at least 3 years after the tax year these relate to.

An employer must report what they owe at the start of the financial year if their annual payroll bill, or combined bill, in the previous year was in excess of £3 million. The employer must also report to HMRC if they think their annual pay bill, or combined bill, will be more than £3 million. For those employers whose wage bill unexpectedly exceeds the threshold during the course of the year, they must start reporting at the point at which this happens.

If the employer has started paying the apprenticeship levy, they must continue to report and pay this, even if their annual payroll bill ultimately falls short of £3 million. The employer will then receive a refund by way of a PAYE credit for any overpaid levy for that year.

For connected companies or charities, the employers must also report how they have divided their apprenticeship levy allowance the first time that they pay the levy. Once a decision is made on how to split the allowance, this cannot be changed during the tax year. The way in which the levy allowance is divided across connected companies or charities can only be revisited at the start of the following tax year. Importantly, connected companies or charities must each tell HMRC how much apprenticeship levy they owe.

Apprenticeship levy FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, 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 legal advice should be sought.