Apprenticeship Levy - another blow for UK employers

From April 2017, large UK employers will be subject to an apprenticeship levy on their payroll costs.  The main purpose of this levy is to encourage employers to invest in training for apprentice's and achieve the government’s target of 3 million apprenticeship starts by the summer of 2020.  The levy is expected to raise £3 billion annually over the next 5 years.

The levy will be payable at a rate of 0.5% of an employer’s total payroll costs and will be payable through Pay As You Earn.  Each employer will be eligible for a £15,000 allowance to offset against the levy, which means that it will only affect employers with payroll bills exceeding £3 million.  This is less than 2% of all employers but is still a large number of businesses across the UK.

The employer’s total payroll costs will include employees’ total earnings but will exclude other payments such as benefits in kind.  As such, the levy could be tricky to calculate in practice.

Although each employer will receive a £15,000 allowance, there will be a connected persons rule, similar to that applied to the Employment Allowance for National Insurance Contributions, so that employers with multiple payrolls will not benefit from multiple allowances.

As an example, a typical employer with 200 employees with an average gross salary of £25,000 could be £10,000 worse off as follows:

Total payroll costs:  200 x £25,000 = £5,000,000

Levy charge:  £5,000,000 x 0.5% = £25,000

Allowance:  £25,000 - £15,000 = £10,000 levy payable

The good news is that the levy will be ring-fenced by HMRC to benefit companies that employ apprentice's.  The levy will be stored as electronic vouchers which can then be used by employers to purchase apprentice training from recognised providers.  The government have declared that employers committed to training can ‘get out more than they pay in’ in the form of a digital top up.  All large employers across all business sectors will be subject to the levy regardless of whether they already employ apprentice's or subsequently reclaim a voucher.

The electronic vouchers will encourage employers to invest in apprenticeship training but will allow employers to retain control as they can decide whether or not they take on apprentices.

This levy is another blow for employers who have already been hit by the introduction of the National Living Wage and an increase to the National Minimum Wage.  However, for businesses that employ apprentice's it could offer an opportunity to cut overall costs of providing the apprenticeship's.

In addition, as we mentioned in one of our previous notes , from April 2016 businesses that employ apprentice's under 25 years of age will not incur employer NIC liabilities on wages paid to those individuals (up to certain limits).  Therefore, it is not all bad news.

If you believe that your organisation will be affected by the apprenticeship levy and would like to discuss this in more detail, please contact our team.