Understanding The Apprenticeship Levy: What is It and When Does it Kick In?

Trying to wrap your head around The Apprenticeship Levy? 

Wondering if it applies to your business or what you're expected to do?

Below, we'll demystify all of the complexities around the levy and dive into exactly who it works, what the benefits are and how you can make the most of it.

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What is The Apprenticeship Levy?

The Apprenticeship Levy is a policy the UK government introduced back in 2017 to help promote apprenticeship programmes.

It's essentially a sum of money that needs to be paid by employers to help fund apprenticeship courses in the workplace.

It applied to larger employers with an annual wage bill of over £3 million - this just means the total of all salaries payable by an employer each year.

The levy means that these employers need to set aside a small percentage (0.5%) of their payroll costs.

And this money then goes into a special fund that helps fund apprenticeships.

If you're one of the organisations who meets the threshold required to contribute, you'll be able to use this fund to pay for training apprentices.

If you're a smaller employer who doesn't meet the £3 million threshold, the government will provide you with financial support to help train apprentices.

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When do you need to pay the levy?

The Apprenticeship Levy works on a monthly basis - so you're required to report your payroll costs and pay the levy to HMRC by the 19th of each month.

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How does The Apprenticeship Levy work?

You calculate your levy

Under the scheme, eligible employers need to report their payroll costs and the 0.5% levy to the government.

Since The Apprenticeship Levy is calculated monthly, there may be months where you end up going over the £3 million trigger if you pay bonuses within that specific month. 

So for example, if your monthly  NIable pay bill was £350,000

£350,000 x 0.5% = £1750 levy due

However, as part of the scheme, you get a £15,000 annual allowance (which works out at £1250 per month).

And so £1750 - £1250 = £500 levy payable that month.

The levy is calculated on a cumulative basis. 

So, in the following month, the calculation would take into account the NIable pay bill to date, allowance to date and the amount of levy paid to date.

You can report your Apprenticeship Levy each month using your Employer Payment Summary.

Make sure to include:

• The annual Apprenticeship Levy allowance you’ve divided to that  PAYE scheme (if you are connected to another company you can split the £15,000 allowance - more on this further down👇).
• The Apprenticeship Levy you owe to date in the current tax year

*You'll be required to keep records of any information you have used to work out your levy payment for at least 3 years after the tax year which they relate to.

Once reported, you don't need to take any special action to pay your levy, this'll just be part of your PAYE bill.

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Funds get allocated

The funds collected from the levy are then credited back to your digital apprenticeship service account.

In addition to the levy payment, the government will add a 10% top-up to the funds in your digital account.

So if you contribute £20,000 as the levy, the government will add £2,000 topping up the total available funds to £22,000.

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You can then invest in apprenticeships

Once credited back to you, you can use these funds to finance the training and assessment costs of apprenticeships within your company - you can hire new apprentices or provide additional training to your existing employees.

Note: The funds in your digital account remain available for 24 months. If not used within this period, unused funds expire and return to the government's general apprenticeship funding pool.

And you can also get extra government support

If you use up all the funds in your digital account for training, but still want to invest in more apprenticeships, the government can provide additional financial support.

They'll cover most of the training costs (95%) -  you'll just need to pay the remaining 5%.

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Who pays The Apprenticeship Levy? Are there any exemptions?

As covered above, eligibility for the Apprenticeship Levy is determined based on your annual wage bill which includes all payments subject to Class 1 secondary National Insurance contributions - so things like wages, bonuses, commissions, and pension contributions.

UK employers with an annual wage bill of over £3 million are considered "levy-paying employers."

Although there is an allowance that offsets the levy payment (as mentioned above).

Each employer receives a £15,000 annual allowance to subtract from their levy liability.

And while the Apprenticeship Levy is mandatory for eligible employers, there are some exemptions and allowances...

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Smaller companies 

If you don't meet the £3 million threshold you do not need to pay the levy.

However, you can still access government support to fund apprenticeship training by contributing just 5% towards the cost - the government will cover the remaining 95%.

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Connected companies

Some employers may be part of a group of 'connected companies'.

To be eligible to claim The Apprenticeship Levy Allowance, a company must not be connected to another company. This means that whoever owns a company cannot own another company and claim the levy on both.

They can, however, they can claim across multiple companies.

The £3 million threshold and the £15,000 allowance are shared across the group of connected companies, rather than applied to each company individually...

You'd just have to decide where to claim the levy allowance at the end of the tax year as this can't be changed until the next tax year comes around.

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Nonprofits

Charities are exempt from paying the Apprenticeship Levy, regardless of their wage bill.

They don't need to make any levy contributions, so they can access government support for apprenticeship training without any financial burden.

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Benefits of using The Apprenticeship Levy

If you happen to fall under the eligibility criteria, there are plenty of benefits you can take advantage of...

Cost-effective talent development

According to the British Business Bank, it costs a business an average of £3,000 to hire someone on an average UK salary if using a recruiter.

The Apprenticeships Levy offers a cost-effective way for you to develop talent internally.

Instead of just relying on external hiring your apprenticeship funds will go towards training existing employees, which will save you both recruitment and onboarding costs.

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Customised training programs

If you're an eligible employer, you'll still have the flexibility to design apprenticeship programs that are in line with your specific needs.

This means you'll be able to tailor the training to meet your business' objectives as well as any industry requirements.

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Filling skills gaps

In November 2022, 13.3% of businesses surveyed by the ONS reported experiencing a shortage of workers.

With many industries facing skills shortages or specific skill gaps, schemes like The Apprenticeships Levy are designed to help fill these gaps by training apprentices in the specific skills required for their sector.

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Employer branding boost

Employers that actively participate in apprenticeship schemes tend to have a positive reputation within their industry as well as positive media coverage.

It should also help with attracting new talent - showing you're committed to developing talent will clearly signal that you're a supportive employer that invests in its employees.

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Access to diverse talent pool

Apprenticeships help you tap into a diverse pool of talent...

And the talent market is currently experiencing a shift away from graduates and towards a younger candidate.

The Institute of Student Employers found that 23% of companies were planning to switch from hiring university or college leavers to young people with only school-level education.

This means employers will be investing in vocational training for early-career employment, with more specific skills and on-the-job training.

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Meeting industry standards and regulations

Some industries have strict regulatory requirements for personnel.

The apprenticeship levy enables these businesses to stay compliant with industry standards by training  employees with the necessary qualifications.

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How to make the most of the Apprenticeship Levy

To get the most out of the Apprenticeship Levy, we'd recommend taking the following steps:

Identify skill gaps

First off, you'll want to map the skills of your current workforce.

• Are there any specific skills that your organisation is missing?
• Are there any departments or teams that would benefit most from apprenticeship training?

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Tailor-make your apprenticeship programs

Once you know which skills you're missing, you can then create personalised training programs that are  moulded around your business' needs. 

These programs should address your specific skill gaps and provide a clear path for career progression.

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Make sure you use trusted training providers

When it comes to actually getting your training underway , we'd recommend taking your time to shop around for a reputable training provider with a track record of delivering high-quality apprenticeship programs.

If you're not sure where to begin, you can start by looking at some of the highest rated providers here.

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Don't forget to offer support

To get the most out of the levy allowance, be sure to actually encourage learning and development within your organisation's culture.

Support apprentices throughout their journey and make sure there are actually opportunities for them to apply their new skills in real-world scenarios.

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Does using an automated payroll solution make a difference?

The short answer here is no... you can absolutely take advantage of the Apprenticeship Levy no matter what process or tools you use for payroll management. 

However...

Using an automated solution like Pento will take the stress out of payroll and streamline your process. 

Automated Calculations: Cut down on administrative time - Pento will accurately calculate your Apprenticeship Levy based on your pay bill and the current levy rate. This means you don't need to waste time on manual calculations or risk making errors.

Real-time updates: Pento gives you real-time updates on your pay bill and the levy amount owed so you can stay informed about your levy liability. If your pay bill fluctuates throughout the year, levy contributions will be adjusted accordingly.

Direct payments: An automated payroll solution like Pento will allow you to set up direct payments to HMRC for the Apprenticeship Levy so you never miss a deadline.

Comprehensive reporting: Pento generates detailed reports and documentation related to the Apprenticeship Levy - like records of levy payments, apprentice head-counts and levy allowances.

EPS submissions: Unlike most other payroll software on the market, Pento will submit an Employer Payment Summary to HMRC for you with all the necessary information around your levy payment.

Apprenticeship Levy FAQ

How much is The Apprenticeship Levy?

The Apprenticeship Levy is calculated as 0.5% of an employer's NIable pay bill each month.

The levy allowance is £15,000 per year which can be offset against any apprenticeship levy due to be paid each month.

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How is Apprenticeship Levy calculated?

Levy-paying employers need to contribute 0.5% of their total annual payroll costs as the levy.

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Can levy funds be transferred?

You have the option to transfer up to 25% of your annual levy funds to other employers.

This means you can offer training and development of apprentices outside of their own organisation.

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Are there incentives for hiring apprentices?

Yes, employers get additional incentives for hiring apprentices.

For apprentices aged 16 to 18, the government provides 100% of the training costs, regardless of how big your business is.

There are also cash incentives for hiring new apprentices of different age groups…

Apprentices under the age of 25 can go on National Insurance category H, which means you don't pay NI until they earn over £50,270 per year - so you’ll get a sizable chunk of NI relief for employing apprentices.

There’s also a lower national minimum wage for apprentices under 19, or over 19 in the first year of their apprenticeship.

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Do Apprenticeship Levy funds expire?

After 24 months, any unused allowance will be put back into the general funding pool - this is to encourage businesses to actually use their funds.

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