The apprenticeship levy and what you need to know

A woman in a hardhat to illustrate the apprenticeship levy

As the government’s new apprenticeship levy comes into force this month, designed to boost the number of firms investing in skills for young people, the IoD explains why businesses need to be aware of its potential impact

Business owners in England are being advised to pay close attention to new rules about apprenticeships in light of a government levy that comes into effect this month. From 6 April, the reform, which aims to boost the skills training of young people, requires all employers operating in the UK with an annual wage bill of more than £3m to invest in apprenticeships.

The government hopes this new tax of 0.5 per cent of a company’s annual pay will help fund around three million new apprenticeship ‘starts’ over the next three years. This payment will accumulate in a digital account that will enable companies to buy training or apprenticeships from a registered provider. Large employers will be able to reclaim the levy in apprentice training vouchers, so for every £1 paid via the levy, the scheme pays back £1.10 in vouchers to put towards apprenticeships.

With an estimated 1.3 per cent of employers in England slated to pay this new levy, businesses with an annual wage bill under £3m are exempt, but will be eligible for 90 per cent government funding for apprenticeship training and assessment, provided they pay the remaining 10 per cent themselves. This government co-investment also applies to levy-paying employers with insufficient funds in their account to pay for the cost of the training they want to purchase.

Companies with fewer than 50 employees who take on an apprentice aged 16–18, or one with disabilities or learning difficulties aged 19–24, will receive 100 per cent government funding. This new funding system comes into effect on 1 May, and any apprenticeships started before that date will be funded through to completion according to the existing rules.

Employers will pay the levy to HMRC through PAYE. Access to levy funds, meanwhile, will be available through a new digital service on the website, with the first funds appearing in accounts in late May. Companies should note these funds will expire after 24 months and separate arrangements will be in place for Scotland, Wales and Northern Ireland. Here’s an expert view on the new rules…

How does this new levy benefit business?

“The government believes the levy will see an upsurge in the number of businesses investing in apprenticeship programmes, as having paid the levy they will then be obliged to spend on training,” says Andy Silvester, the IoD’s deputy director of policy. “Something needs to happen – the UK lags behind other European countries when it comes to productivity and, for many, the key reason is the lack of appropriate skills in the workplace. Some are concerned, however, that the heavy-handed approach of a levy is simply going to be seen as another tax, and could take money away from existing apprenticeship schemes.”

How will this help apprentices?

According to Silvester: “Apprentices are said to benefit from more work experience opportunities than they might on the ‘academic’ route. It is worth mentioning, however, that the government has focused largely on apprenticeship ‘starts’ up to now, seeking three million of them. The number of people completing an apprenticeship, as opposed to those starting, is dramatically lower, and it will be important that the apprenticeship levy doesn’t do anything to endanger those high-quality schemes.”

Does the British economy really need the levy?

“There has been much gnashing of teeth in Whitehall about Britain’s ‘productivity puzzle’ and they believe this levy will help them solve it,” says Silvester. “We come 16th out of 20 in international league tables of developed countries in this area, and the apprenticeship levy is designed to complement other reforms, such as the introduction of T-levels. If apprentices were taught not just the nuts and bolts
of the trade, but were encouraged to instil more creative thought processes and ‘soft skills’, then the programme will go some way to ensuring our young people are able to not just survive but thrive in an increasingly automated world.”

What will the cost be to employers?

“Many firms that will be hit by the levy are considering axing or redesigning their graduate or internship programmes,” adds Silvester. “With so much uncertainty around how the levy will work, and with too little information emanating from the government, we will have to take a ‘wait and see’ approach. The risk is that the levy could create ‘tick-box apprenticeships’ as opposed to more thought-out, considered and long-term training programmes to fill the skills gaps of the future.”

More information on the apprenticeship levy

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