What is the Apprenticeship Levy?

Posted on: February 20th, 2017

For many smaller employers apprenticeships are a key means of recruiting the next generation of employees, providing an affordable way to equip employees with the necessary training to meet the business’ needs.

What is the apprenticeship levy?

The levy is a new initiative which was announced by the Government to help it meet its ambitious target of creating 3 million more apprenticeships by 2020.

In essence, the levy is a payroll tax. From April 2017, employers will be required to pay 0.5% of their total payroll costs towards an apprenticeship fund. An offset allowance means, to start with, the levy will only be paid by employers with a payroll of £3 million or over.

The sums paid under the levy will go into a digital account for that employer, which can only be used for apprenticeship training and assessment. This account is topped up by the Government, so employers will get £1.10 back for every £1 they put in. The funds will work on a ‘use it or lose it’ basis and will expire after 24 months if not used. The payments are deducted at source, leaving no room for avoidance.

What is the impact of the apprenticeship levy?

This is a significant extra cost for larger businesses. It will also impact on smaller businesses that have high staff costs – it only takes 100 employees on an average salary of £30,000 to exceed the offset allowance. Recruitment agencies whose payroll costs tend to be significantly higher than other businesses are also likely to be adversely affected.

Although more apprenticeships are needed to address the skills gap, particularly in the engineering and manufacturing sectors, the problem is the initiative is too generic. The Institute for Fiscal Studies has warned that the Government’s proposals risk increasing quantity at the expense of quality.

Many employers who will have to pay the levy will have no existing apprenticeship program and will genuinely have no need for this type of structured training. These employers will either not increase apprenticeship numbers, or will provide apprenticeships with no real value for the industry, perhaps just by re-labelling current programmes. The levy will therefore not necessarily address the skills shortages which it is intended to.

The levy may also have the unwanted impact of driving wages as a whole down, given the lower minimum wage that applies to apprenticeships and the fact that businesses may look to reduce their payroll costs to avoid reaching the £3 million payroll threshold.

Employers that don’t pay the levy will still have access to Government support for apprenticeships, which currently includes initial apprenticeship grants and contributions towards all or some of the apprentice’s training, depending on the employer’s size.

Unfortunately, however, smaller employers which have a real need for high quality candidates to fill their apprenticeships may find that interest in their opportunities decrease, with candidates prioritising larger companies’ reputations over the quality of the apprenticeship offered.