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The apprenticeship levy explained

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For a summary of the information released by the UK Government on 12th August 2016, read our UK Government publishes new details on apprenticeship levy blog post.

Last year, the UK Government announced all large businesses should shoulder the responsibility of growing apprenticeship numbers.

Its solution is the so-called apprenticeship levy – due to be introduced from April 2017. It aims to raise £3 billion a year to meet the target of funding 3 million high-quality apprentices by 2020.

But what does it involve? Here’s what you need to know:

The apprenticeship levy is aimed at larger businesses

For all employers operating in the UK, the levy has been set at 0.5% of all company’s pay bill (payable through PAYE alongside income tax and NI) – but it only applies to those whose wage bill is greater than £3 million pa. Also, employers will receive £15,000 from the UK Government to offset against the levy – paid in monthly instalments of £1,250. So, if an employer has 250 staff each earning £20,000 the levy will be 0.5% of its £5 million wage bill (£25,000), minus the £15,000 they are given as the offset. This means the levy for this business is £10,000. To fall under the requirement of the levy, an organisation's pay bill is defined as the total earnings of all its employees. It does not include other payments, like benefits in kind. UK Government figures suggest around 2% of employers will have to pay the levy.

Employers get their money back (and more), if they commit to training apprenticeships

Employers in England will be able to claim back their levy contribution in the form of digital vouchers, which they can then use to pay for training apprenticeships. Essentially this means the levy is designed purely to encourage employers to support apprenticeships. To further encourage this, those paying the levy receive an additional 10% top-up to spend on training – meaning they can draw £1.10 for every £1.00 they put in. One final incentive to use the money for apprenticeship training is the fact that the UK Government has announced any unspent funds left in an employers’ digital accounts will expire after 24 months.

There will be regional variation

Only employers in England are currently due to receive funding through a digital account, however an estimated £0.5 billion raised by the levy will be distributed to the governments in Scotland, Wales and Northern Ireland. The legislatures there will decide how the money will be allocated. If an employer has offices in more than one nation, the proportion of their digital voucher funding available to be spent in England will be equal to the proportion of staff they employ in England. For example, if 75% of an organisation's pay bill is in England, they’ll get 75% of their levy payment into their digital account.

Between now and April 2017

Employers looking to start apprenticeships before April 2017 will be able to receive funding as per the current rules [employers of all sizes currently have to pay a third of training costs with the Skills Funding Agency agreeing to cover the rest]. Those who want to wait till next year will be able to register for their digital accounts from January 2017.

To avoid unnecessary red tape, employers won’t actually touch their digital vouchers themselves. When they choose their training partner(s), the UK Government’s new digital Apprenticeship Service will send the money directly to them on the employers’ behalf. Funding caps on the amount employers can spend on any one individual are due to be announced soon. This was supposed to have been announced already, but there has been a delay because of the results of the EU Referendum.

Apprenticeship levy: Two working examples

Medium-sized employer

  • Employer of 250 employees, each with a gross salary of £20,000

  • Pay bill: 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 

Large employer

  • Employer of 7000 employees, each with a gross salary of £32,000

  • Pay bill: 7000 x £32,000 = £224,000,000       

  • Levy sum: 0.5% x £224,000,000 = £1,120,000

  • Allowance: £1,120,000 - £15,000 = £1,105,000 annual levy payment