Updated January 2017
What is the apprenticeship levy?
The apprenticeship levy is being introduced from 6 April 2017 to reverse the decline in use of apprenticeships. It will operate as a charge levied on employers whose annual payroll bill is more than £3million (affecting around 2% of UK employers).
Levy-paying employers will be able to spend the levy to pay for apprenticeship training for apprentices aged over 16 via a digital voucher system which will be available for use from May 2017.
Which businesses need to pay the levy?
Employers with a pay bill of more than £3 million each year will be subject to the levy. ‘Employer’ means a secondary contributor with liability to pay Class 1 secondary National Insurance Contributions (NICs) for their employees.
The levy will be charged at a rate of 0.5% of the business’ annual pay bill. With an allowance of £15,000 per year to offset against the levy, it is only payable on pay bills of £3 million or over.
What counts towards the pay bill?
The pay bill is based on the total amount of earnings subject to Class 1 secondary NICs. It is calculated to include earnings below the secondary threshold and the earnings of effectively NIC exempt young employees (under 21 or an apprentice under 25). It does not include benefits in kind (which are subject to Class 1A NICs).
The levy allowance
Businesses will pay the levy on their entire pay bill at a rate of 0.5%. However, they will have a levy allowance to offset against this. The levy allowance is worth £15,000 for each tax year.
The levy allowance will accumulate throughout the year and any unused allowance will be carried from one month to the next.
Where several employers are connected for tax purposes (in broad terms, where one company controls another or they are under the same control) they will only be able to use one £15,000 allowance.
A group of connected employers must decide what proportion of the levy allowance each employer in the group will be entitled to for the relevant tax year. This decision must be taken at the beginning of the tax year and will be fixed for that tax year, unless a correction is necessary because the total amount of the levy allowance claimed across the group exceeds £15,000. Each employer in the group will then calculate what they have to pay based on their pay bill, but using only their share of the £15,000 levy allowance.
What is an apprenticeship?
The digital account may only be used to pay for training for apprentices. The key criteria are:
- the apprentice must be employed in a real job; they may be an existing employee or a new hire;
- the apprentice must work towards achieving an approved apprenticeship standard or apprenticeship framework;
- the apprenticeship training must last at least 12 months;
- the apprentice must spend at least 20% of their time on off-the-job training; and
- the apprenticeship training must begin on or after 1 April 2017.
Paying the levy
The levy will be calculated, reported and paid through the PAYE system. Payment is to HMRC and it will be allowable for Corporation Tax.
Businesses which already contribute to an industry-specific levy or similar system will nevertheless be required to pay the apprenticeship levy.
Recovery from employees will be prohibited and anti-avoidance provisions will apply.
Digital apprenticeship service accounts
Businesses will be able to access funding for apprenticeships through a new digital apprenticeship service account.
Levy-paying businesses will be able to register to create accounts from January 2017 and to use the service to pay for the training and assessment of apprentices from April 2017.
The levy will apply to employers across the UK but each of the UK nations will have their own system for administering the training funds. To calculate how much businesses will be able to spend on apprenticeship training through the English online system, the Government plans to use data that it already holds about the home address of employees in order to calculate the proportion of the business’ pay bill paid to employees living in England. Businesses based across different UK countries should therefore check that they have up-to-date and accurate information. The Government will provide more details about this in October 2016.
Connected employers will be able to collect their funds together into one digital account by registering to have multiple Pay as You Earn (PAYE) schemes attached to a single digital account.
The Government will apply a 10% top-up to the funds in the digital apprenticeship service account.
Using funds in the digital account
In the first year of the levy, businesses will be able to use the funds in their digital account to pay for apprenticeship training and assessment for their own employees only. The Government is considering whether businesses will be able to fund training for businesses in their supply chains or for apprentices employed by Apprenticeship Training Agencies and will confirm its decision in June 2016.
Funds will expire 24 months after they enter the digital account unless spent. The funds cannot be used to pay for apprenticeship training which commenced or will commence before 1 May 2017.
Apprenticeship training can either be on a new apprenticeship standard, or on an existing apprenticeship framework (although the latter will be phased out between now and 2020).
Apprenticeship standards are a new type of apprenticeship developed by employer groups. Each standard covers a specific job role and sector and sets out the core skills, knowledge and behaviours an apprentice will need to be fully competent in their role. Every apprenticeship standard and framework will be placed in a funding band. The funding band will set the maximum amount of funding that can be used towards training and assessment costs, over the length of each apprenticeship. There are 15 proposed funding bands, ranging from £1,500 to £27,000. The same funding bands will apply to all employers paying for apprenticeship training.
Businesses can use funds in their digital account to pay their training provider, up to the maximum allowed by the relevant funding band. If an employer negotiates a price with a training provider that is more than the maximum allowed by the funding band, then it must pay the difference between the band maximum and the agreed price, in full and this payment can’t be made from its digital account.
Businesses will need to choose a training provider and approved assessment organisation in order to pay for apprentice training through the digital account and agree a price with the training provider for the delivery of apprenticeship training towards a specific standard or framework and of assessing the apprentice at the end of their apprenticeship.
The cost of the training selected will be deducted from the business’ digital account on a monthly basis over the lifetime of the apprenticeship. If the cost of the training exceeds the amount in the digital account, the employer will need to cover the difference, although some government support will also be made available (called “co-investment”).
Funds in the digital account, and funding provided by the Government through co-investment, can only be used towards the costs of apprenticeship training and end point assessment with an approved training provider and assessment organisation. It cannot be used for other costs related to apprentices such as:
- travel costs
- managerial costs
- work placement programmes
- the costs of setting up an apprenticeship programme.
Detailed funding rules will be published in October 2016 and finalised by December 2016.
The UK government will provide additional funding under the co-investment scheme. Employers which do not pay the levy or which pay the levy but do not have sufficient funds in their digital account to cover the apprenticeship training and assessment costs in a particular month will be required to co-invest 10% of the costs, with government paying the remaining 90%. In the first year of the new funding system, employers will need to pay their co-investment share directly to training providers. The government anticipates that, in time, this will be done through the digital account instead.
Additional support for certain apprentices
The Government proposes to waive the co-investment requirement for small employers (those with fewer than in respect of 16-18 year old apprentices or apprentice aged 19-24 who are care leavers or have a Local Authority Education, Health and Care plan.
The Government intends to make an additional payment of £1,000 to employers and a further £1,000 payment to training providers in respect of apprentices aged 16-18 years of age, 19-24 year old care leavers and those who have an Education, Health and Care Plan.
The Government will also make an additional payment of equivalent to 20% of the funding band maximum to train 16-18 year olds and 19-24 year olds who were formerly in care or who have an Education and Health Care Plan. This is designed to support stability and counteract the higher prices for training younger apprentices.
An additional £600 will be given to employers for training an apprentice who lives in an area determined to be in the top 10% most deprived areas in the UK, an additional £300 for an apprentice who lives in an area in the next most deprived 10% band (10 – 20%) and an additional £200 for an apprentice who lives in the next most deprived 7% band (20-27%).
In addition, a simplified version of the current system will be retained and the same level of funding will be provided to support apprentices from disadvantaged areas. Both of these will be in place for the first year whilst a fuller review is being conducted.
Support for English and maths training
The Government is proposing to pay training providers £471 for training for apprentices to gain the minimum standard of Level 2 in English and maths. This will come direct from the government and will not be deducted from an employer’s digital account.
Additional learning needs
The government proposes to pay training providers up to £150 a month to support apprentices who require additional learning support as a result of conditions such as dyslexia, learning difficulties or disabilities, plus additional costs based on evidenced need. This is a continuation of the current system.