The Apprenticeship Levy - what impact will it have?

The Apprenticeship Levy
The Apprenticeship Levy

In its election manifesto the government committed to creating three million new apprenticeships in the next five years and last year’s Autumn Statement confirmed that an apprenticeship levy would be introduced from April 2017 to fund this increase. Businesses with a pay bill of more than £3 million will have to pay a levy at the rate of 0.5 per cent of their total gross pay bill to fund apprenticeships with an annual allowance of £15,000 to offset against the levy. While the creation of three million new apprenticeships by 2020 is a positive news story, the proposed introduction of the apprenticeships levy has led to concern amongst businesses about what impact it will have on them.

Current position

At present, the government provides 100% of the funding to cover the training costs for apprentices aged between 16 and 18 and 50% for 19 to 24 year olds. The funding is paid via the Skills Funding Agency (SFA) direct to the training provider responsible for providing and supporting the apprenticeship.

During their first year, apprentices are entitled to be paid the applicable national minimum wage for time spent “on the job” which is currently £3.30 per hour for those aged 16-18 and 19 or over. Employers are responsible for paying apprentices’ wages.

Businesses may also be eligible for a £1,500 apprenticeship grant which is available to help small and medium sized employers to recruit new apprentices aged between 16 and 24. Employers can claim support for up to ten apprentices. The grants are in addition to any training costs for apprentices and do not have to be repaid.

What’s changing?

The apprenticeship levy will be payable through PAYE alongside income tax and National Insurance contributions and those businesses who pay the levy will receive an annual allowance of £15,000 to offset their costs in this regard.

Alongside the introduction of the levy, an online portal known as the Digital Apprenticeship Service will be created, which all businesses will have access to regardless of whether they pay the levy. The portal can be used to find an apprenticeship and choose a candidate as well as an accredited training provider.

Businesses who pay the levy will be able to access more funding than they pay through the levy by receiving further top-ups from the government. However, if funding is not used within two years it will be made available to other businesses including those who do not pay the levy.

The government has committed to not only creating a greater number of apprenticeships but to ensuring a greater quality of training as well.The newly created Institute of Apprenticeships will be responsible for overseeing the standard of apprenticeships and ensuring that they last at least 12 months and involve at least 20% on the job training.

What will this mean for businesses?

One of the main advantages to businesses in taking on apprentices has been that they are relatively inexpensive, have a genuine interest in their work and that government funding shares the costs burden. The reaction from industry to the proposed levy has not been positive and many see it as a new payroll tax. Although HMRC has estimated that the levy will be paid by less than 2% of employers, there is widespread concern that the introduction of the levy could lead to the few subsidising the many. The levy may also mean that some businesses turn to graduate recruitment instead to avoid the levy while others may switch all of their training to apprenticeships thereby increasing the volume but potentially sacrificing quality.There are also concerns that the draft legislation will add to business’ compliance costs because although it is fairly closely aligned with the existing National Insurance contributions legislation, there are key differences.

Businesses will ultimately want reassurances from the government that the levy will be used to fund high quality apprenticeship training and that they will be given real control over how the system is administered.