- Understanding the new Apprenticeship Levy

This month is the first month that some employers will be paying into the Apprenticeship Levy, with funds due to appear in business’ digital accounts this time next month, however there is still a lot of confusion over what this means. A recent survey carried out identified that 64% of small firms in Greater Manchester and Cheshire were unclear about apprentice funding, with 56% saying that they felt this lack of understanding was the biggest barrier to them recruiting an apprentice (Manchester Evening News).

This article aims to help you to better understand what the Apprenticeship Levy is, why it is here and what it means for you.

What is the Apprenticeship Levy?

In basic terms, the Apprenticeship Levy is a payment that large employers from both the public and private sector have to pay to go towards funding Apprenticeships and training in the UK. The money is sent via PAYE returns to HMRC.

What is the purpose of it?

The core purpose of the Apprenticeship Levy is to increase the quality and quantity of apprenticeships.

This scheme has been set up to encourage employers to invest in more apprenticeship programmes in an attempt to combat the skills shortage currently being faced in the UK. Last year’s annual CBI (Confederation of British Industry) survey found that 69% of the 500 companies surveyed were concerned about not being able to find enough highly-skilled staff, compared with 55% last year (BBC News). In particular, a different survey conducted by the BCC indicated that a shortage of workers with digital skills is hampering the productivity of UK businesses.

As a response to these results the Government has planned to raise the number and quality of apprenticeships to create more skilled workers in the UK, with a target of creating 3 million apprenticeships this term. The levy is predicted to raise £3 billion a year by 2019-20, with the Government predicting that of this, £2.5 billion will be spent in England and the remaining £500 million allocated to Scotland, Wales and Northern Ireland (Personnel Today).

Who will be affected?

Not all businesses have to pay in to the levy, but all businesses are able to benefit from it (or should be able to, if the Government’s plans work as intended).

Whether or not a business is required to pay in to the levy is determined by the size of the business’ payroll. Businesses that have a higher wage bill than £3 million per annum will have to pay in, however those whose payroll falls below £3 million will not. Only 2% of employers fall into this higher bracket payroll, meaning only the larger SMEs will have to pay the levy.

The figures

The amount payable is 0.5% of a company’s payroll, however every employer receives an allowance of £15,000 to counterbalance what they owe. This is why the payroll threshold is set at £3 million per annum; 0.5% of £3,000,000 is £15,000, so any company with a payroll of £3 million or below is able to offset their payment with the £15,000 allowance.

Eligible businesses will be required to make this payment monthly, with all the money going into online digital accounts. Each business will have its own online digital apprenticeship service account which holds their contribution as well as the 10% Government top-up that they can use for apprenticeship training and assessment.

Example case study

Business A has an annual payroll of £6 million.
£6,000,000 x 0.5% (levy amount) = £30,000.
£30,000 – £15,000 (Government allowance) = £15,000.
£15,000 + £1,500 (10% Government top-up) = £16,500.

Business A would therefore have £16,500 available in their digital account to pay for apprenticeships training and assessment.

Important Note: Funds in digital accounts expire 18 months after they appear if they are not spent, including top-ups (leftover funds will be put back into helping smaller businesses).

Non-Levy Payers

Businesses who are not paying into the levy will not be able to use the new service to pay for apprenticeship training until at least 2018, when all employers will be able to use the service. Until then, non-levy payers can use the new funding system for businesses running apprenticeship programmes that also comes into effect this month.

As part of this new system, each individual apprenticeship framework and standard will be allocated its own funding band. Businesses pick the apprenticeship they want, agree a cost with their chosen provider and then the Government will pay 90% of the agreed price (up to the capped amount specified by the apprenticeship’s funding band), and the employer pays the remaining 10%. As both the employer and the Government are paying towards this, it is called a ‘co-investment’. The payments will go directly to the provider.

Small employer incentive

Small businesses are also still eligible to apply for the Apprenticeship Grant for Employers 16-24 (AGE) until the end of the 2016/17 academic year. This rewards smaller employers, with less than 50 employees, who take on new apprentices between the ages of 16-24 (or apprentices who have formerly been in care of has a Local Authority Education, Health and Care plan and is between 19-24 years old). If awarded, the Government would pay 100% of the apprenticeship training and assessment costs.

What response has it received?

There have been mixed reviews about the Apprenticeship Levy, with some praising the initiative and others expressing concern over whether the Government’s plans will actually be achieved.

Pros

The levy has received praise from people who see it as a positive way to increase the quality of apprenticeships and to reiterate to business’ the importance of apprenticeships when it comes to increasing our skillset in the UK.

Skills Minister Nick Boles has said that the £2.5 billion that the levy will raise [in England] is expected to cover all employers with apprentices, rather than just the ones paying in, as many employers will not use the money in their digital accounts and these leftover funds will be put back into helping smaller businesses.

Cons

The main negativity surrounding this new system is the fact that people are struggling to understand it. A recent survey of 500 senior business leaders found that nearly a quarter (23%), were unaware of the changes to the apprenticeship system and 28% said they did not know if they were required to contribute to the levy. Kirstie Donnelly, City & Guilds Managing Director said, “The lack of awareness about the new apprenticeship system among our respondents is a cause for concern and shows that we still have a hill to climb in convincing people about the benefits apprentices can bring to business” (The Telegraph).

Mark Dawe, chief executive of the Association of Employment and Learning Providers (AELP), agrees that smaller businesses could end up losing out in the longer term as he predicts most of the funds will be taken by larger businesses wanting to see a return on their investment.

Thinktank the Institute for Public Policy Research (IPPR) has voiced concerns over the regional inequality in training that this could create. It says that because London and the South East have 38% of the UK’s largest businesses (who will be paying the levy), this is where most of the training will be spent, however only 27% of the population lives in this part of the country.

“The levy will raise less money, and stimulate training less, in the areas that need it most – the regions hit hardest by de-industrialisation, which suffer from low levels of qualification, low productivity and low pay,” it claims.

Whether these concerns come true or not, the crucial point is that businesses need to understand how the system works and most importantly what it can do for them in order for the scheme to be successful.

Su Allen HR helps employers by providing a range of HR support. If you would like to discuss the pros and cons of taking on an apprentice, please do contact us on 01582 883299 or email su@suallen.co.uk