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The Apprenticeship Levy

The apprenticeship levy was introduced on 6 April 2017 and transfers much of the cost of funding apprenticeships from the state to employers. It was introduced in the hope that the levy would improve the quality of apprenticeships whilst addressing the skill gaps in the UK with the government aiming to create 3 million new apprenticeships by 2020. Apprenticeships are a devolved policy and the position may differ for employers with operations in Scotland, Wales or Northern Ireland.

[see Employment rights of apprentices, Apprentices and Trade Unions]

The levy is charged at a rate of 0.5% of the pay bill for a tax year (less an annual allowance of £15,000) and is payable to HM Revenue and Customs (HMRC) through Pay As You Earn (PAYE) alongside income tax and National Insurance. The levy is only payable by UK employers with a pay bill of more than £3 million each year. The levy is therefore 0.5% of pay bills over £3 million in the relevant tax year.

The pay bill is based on the total amount of earnings subject to Class 1 secondary National Insurance Contributions (NICs). Earnings include any remuneration  from employment, such as wages, bonuses, commissions, and pension contributions that NICs are paid on but not benefits in kind.

In return for paying the levy, employers have access to the apprenticeship service where they can spend levy funds, manage apprentices, pay training providers and stop or pause payments to the training provider.

The government applies a 10% top-up to monthly funds entering levy paying employers’ digital accounts for apprenticeship training in England . All funds entering a levy payer’s account are therefore increased, so every £1 is increased to £1.10 in value.

Employers who do not pay the levy do not yet have access to the apprenticeship service. The exception to this rule is that an employer who is not paying the levy, but is receiving a transfer of funds from a levy paying employer will have access to the apprenticeship service.

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Summary of Changes

The updated government funding policy details information on the changes in co-investment and a new concept of transferring funds relating to the levy. The policy also details information on the expiry of funds that is taking effect following the introduction of the levy in 2017. The changes are as follows:

Co-investment – the employer contribution will drop from 10% to 5% for all apprenticeships starting on or after 1 April 2019 for non-levy paying employers.

Transfer – levy paying employers will be able to transfer up to 25% of their annual funding to support apprenticeships in other businesses.

Expiry – unused funds will expire if they have been in an employer’s account for 24 months from May 2019 on a “first in / first out basis”.

The updated policy and the related changes apply to all employers (whether or not they pay the levy). The changes however, apply only to new apprenticeships started on or after 1 April 2019. Apprenticeships started before this date will continue to be funded under the rules that applied when they started.

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Co-Investment

Co-investment is a funding option for non-levy paying employers provided by the government to support their commitment to apprenticeships. It is also available to levy paying employers who want to invest more in apprenticeship training than is available in their levy accounts. This funding is available subject to the employer making financial contributions alongside the government funding.

All co-investment payments are made directly to the training provider. Employer contributions are important as it helps to increase employer engagement and, in turn, the quality of training. Levy paying employers must not ask their apprenticeships to contribute to their training.

There is a funding limit to co-investment. There are currently 30 funding bands with the upper limit of those bands ranging from £1,500 to £27,000. These funding band limits differ dependent upon the apprenticeship. Any training costs above that limit will need to be met in full by the employer.

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Changes to Co-Investment

For all apprenticeships starting from 1 April 2019 the rate of employer co-investment was reduced to 5% of the cost of training and assessment for their apprentices, to the funding band limit with the government providing 95% of funding to cover the remaining training costs. This also applies to any levy-paying employer who wants to invest more in apprenticeship training than they hold in their apprenticeship service account. Here, in any single month where a levy-paying employer has insufficient funds available in their account to meet the full costs of training and assessment, they are required to co-invest 5% of the outstanding monthly balance, with the government paying the remainder. This does not affect apprenticeships that started before 1 April 2019 (they will still attract the employer contribution of 10% and government funding of 90%).

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Transfers

A transfer of funds in an employer’s levy account was introduced alongside the levy to enable employers to transfer some of the funds in their levy account to support apprenticeships in other businesses. Levy paying employers are entitled to make a transfer of up to 10% of the funds available in their levy account to another business.

Where a group of companies are paying the levy together, they can set up a single shared apprenticeship account and pool their funds.

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Changes to Transfer of Funds

Since 1 April 2019, organisations can transfer unused funds in their account to any number of employers, for any number of apprenticeships up to the maximum of the 25% allowance. Employers who have unused apprenticeship funds can find other employers who want to receive a transfer in a number of ways, for example, through employers in their supply chain. Transferred funds will be used to pay for the training and assessment costs of the apprenticeships agreed with the receiving employer.

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Expiry of Funds

On the introduction of the levy in April 2017, funds raised from employers appeared in their apprenticeship service accounts in May 2017. The funds available in an employer’s account were to expire 24 months’ after initially showing in those accounts. The oldest funds expire on a “first in / first out basis”. The purpose of this approach is to minimise the potential for levied funds to expire, as employers will only see funds expire in May 2019 if they have spent less than their contribution from May 2017.

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Update to the Expiry of Funds

May 2019 is the first month that employers will have seen any unused funds expiring in their account as funds were first shown as paid into accounts in May 2017.

In addition to funds paid by an employer into an account, the rules on expiry will also extend to the 10% top up that is paid into an account by the government.  Eligibility for apprenticeship funding will change for some individuals as a result of Brexit. There are detailed eligibility rules which the government will update as and when new arrangements are put in place.