The Apprenticeship Levy and the costs, potential savings, and compliance of employing apprentices

Given the widely publicised skills shortage in the UK labour market, and the continued importance of Life Science companies to the UK economy, we thought it would be helpful to provide an update and give some food for thought as to how apprenticeships can be a core part of how you train employees and how this could potentially help with costs, retention, recruitment, and your business’s growth plans.

1. What is the Apprenticeship Levy and when do I pay it?

The Apprenticeship Levy is a tax. However, the Levy is only payable by employers in the UK with a total annual pay bill over £3m. If you have a pay bill over £3m, you will be required to pay the Apprenticeship Levy charge. It is calculated at 0.5% of your pay bill in excess of £3m. Please note, the Levy is based on your total pay bill, not the pay bill of your apprentices, meaning that regardless of whether you engage apprentices you will pay into the Apprenticeship Levy.

The pay bill is defined as pay that is assessable for employer Class 1 NIC purposes. The Levy is paid through payroll via normal RTI processes (reportable on the Employer Payment Summary), on a monthly basis.

2. What happens if our business is part of a group?

An employer is viewed as a group of connected companies, meaning that where an entity is connected to other entities, only one £3m is available, therefore all the pay bills of the entities within the group need to be added together and 0.5% paid on the total excess over £3m. The £3m allowance is apportioned across the year when calculating how much apprenticeship levy needs to be accounted for under PAYE.

The definition of a group is the same as that used for claiming the Employment Allowance (currently a £5,000 credit that can be used to offset the first £5,000 of employer Class 1 NIC costs incurred for those that qualify – those groups/employers with an employers’ Class 1 National Insurance liability of less than £100,000 in the previous tax year).

The payroll mechanics of the Apprenticeship Levy are not straightforward for those in a Group. It will be important to allocate the Levy allowance carefully to ensure all parties and entities understand what costs they will have in respect of the Levy.

We recommend employers that are in a group review how they have allocated the Levy allowance and the Employment Allowance to ensure both have been claimed correctly. This is an area HMRC will test as part of an Employer Compliance review.

3. Can I access the Levy I have paid to HMRC?

Although the Apprenticeship Levy is a tax, employers can access their Levy funds and use these funds to pay for apprenticeship training and end assessments.

The Apprenticeship Levy that you pay is transferred automatically by HMRC into your online digital Apprenticeship Levy account. It will be important to set up an account to ensure these funds can be utilised. If you do not use these funds within 24 months, they will be lost. Therefore, it is important to plan carefully and review how training and skills and apprenticeships are used within your organisation.

Where your pay bill is not in excess of £3m, you will not have paid into the levy. However, funding is still available. The Government has confirmed it will fund 95% of the costs up to published limits for the qualifying apprenticeships. This is also the case for Levy payers who have used up all their Levy funding in their online account. Further information can be found here. 

Further, employers who do not use all their Levy pot can share 25% of it with other employers – this may therefore be helpful to local communities and be something larger organisations could consider when assessing their approach to corporate social responsibility (CSR) and environmental and social governance (ESG).

It should be noted that the Levy account can only be used to fund apprenticeship training and end point assessments in England. As skills funding is devolved, funding for apprenticeships works differently in Scotland, Northern Ireland and Wales currently. Additionally, the amount going into your online account will also be reduced on a proportionate basis where you have employees who live outside England.

4. If the Levy is a tax, how is there a benefit from it and how can savings be made?

Although the Levy is a tax, the tax sits in your Levy Digital Account to draw down on and use for qualifying training and end-point assessments. There are also some great advantages for employing apprentices that may help reduce costs, where they are right to use for your organisation. We highlight some of the key areas below of how employers may benefit from apprenticeships:

• There is no employer Class 1 NIC liability arises on qualifying apprentices’ pay - Where apprentices under the age of 25 are employed, the organisation will not pay any employer Class 1 NIC on their salary (unless earning in excess of the Upper Earnings Limit (£50,270 for 22/23) for NIC purposes). Therefore, by reviewing what training employees are undertaking and which of those employees that are under the age of 25, significant savings can be made for the employer by making amendments to how training for these individuals is set up.
• The Government top up your Levy Pot by 10% - This means that additional funding is available to pay for training and end assessments on top of what your organisation has had to pay in.
• There are grants available for certain qualifying apprenticeships - You can get £1,000 to support your apprentice in the workplace if they are 16 to 18 years old, 19 to 25 years old with an education, health and care plan or 19 to 25 years old and they used to be in care. You might also be able to get a payment when you hire an apprentice who was previously made redundant.
• Using apprenticeships throughout your organisation can help create a robust progression plan and support retention and recruitment - To utilise Levy funding and encourage ongoing employee development, many employers are looking at how they can align apprenticeships at all levels within their organisation. Employers are therefore focusing on how each department can utilise apprenticeships. Apprenticeship programmes can be used at mid and senior management / executive levels, given the increased availability of higher and advanced levels of apprenticeships. Using these programmes effectively can therefore help retain key individuals, ensure the best talent can be attracted and help the business ultimately grow. Therefore, there could be wider benefits associated with reviewing training structures and employee development programmes, than just a reduction in training costs.
• Using training as a reward - Employers may wish to consider how they utilise training and apprenticeships as part of employee reward, given that skills development is often a key valued employee benefit. Including the costs of training programmes on Total Reward Statements may be particularly engaging for certain employee populations, as it may help these groups understand what their total reward is and the investment being made in their development. This may be something to consider for those more senior in the organisation too, especially if they are looking at embarking on MBA, or similar training programmes that could cost in excess of £20,000 – these might be available as an apprenticeship.
• There is a lower National Minimum Wage limit for Apprentices – It is important to pay a fair and reasonable amount to all employees, including apprentices. Many employers now look to the Voluntary Living Wage as published by the Living Wage Foundation. However, from a compliance perspective, there are specific rates for apprentices under the age of 19, or in the first year of their apprenticeship. This can help manage the complex technicalities of NMW compliance and may provide extra headroom for meeting NMW thresholds where you are paying apprentices amounts in the region of the National Living Wage or at the Voluntary Living Wage limits. Please note, apprenticeship pay is a key risk area that HMRC will review as part of a NMW audit (further demonstrated by the Low Pay Commission’s recent report). Please do take care when considering apprenticeship pay and reward.
• It can help the business innovate by looking to build different skills – As apprenticeship training is undertaken generally by accredited third-party providers, it may help employers innovate and change, potentially enhancing their business – vitally important when costs are tight and competition is fierce.

5. What apprenticeship programmes are currently available?

A list of current apprenticeship standards can be found here. To help the business focus on using apprenticeships where appropriate, one option might be to set department targets for how many employees should be apprenticed.

6. Can we pay ourselves with the Levy we pay – can we become a training provider?

Where a significant proportion of training takes place in-house, the levy can only be used to pay “yourself” where you are a registered apprenticeship training provider (with the Skills Funding Agency). If you are providing skills and training in this area, you would be required to be Ofsted inspected.

More information can be found here on applying to be an “employer apprenticeship training provider”.

7. What will the Budget in March 2023 bring to apprenticeships and the Levy?

It is unknown currently. However, there has been frustration with the “Levy” system and the degree of complexity around the whole apprenticeship system. We await to see if there will be any further changes announced.

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Apprenticeships, training, and the Levy are big topic areas that require careful planning given the detail involved. Please do contact us for more information.

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