Last reviewed 16 May 2017
Since 6 April 2017, a new way of funding training for apprentices has been in effect, replacing the previous system for new starters. Under the new scheme, a levy has been established on companies with a payroll in excess of £3 million and the funds raised will be available for those companies to spend on training apprentices. Any levy amount not spent on apprentice training within two years will go to the Government for general purposes, including funding training for those companies who do not pay the levy — estimated to be some 97 or 98% of businesses. Richard Smith explains the system and how it will operate for both those who pay it and those who don’t.
Why is it being done?
The (now previous) government committed to developing vocational skills and increasing the quality and quantity of apprenticeships as ways of boosting productivity. In what might be seen as a necessary counterbalance to previous government policy of getting 50% of the relevant cohort into university it committed to an additional 3 million apprenticeship starts by 2020.
In order to encourage employers to take on apprentices, the funding for their training will be provided by the Government with at least a large proportion of the money coming from the levy on the largest employers. Those with long memories will remember the Road Transport Industry Training Board (RTITB) and the levy-grant system that operated in the 1970s, indeed still does operate in the construction industry. In addition to the Government’s stated purpose, such levy-grant schemes also go some way towards answering the common complaint that companies spend money on training people only to see those people enticed away by higher wages that companies who do not have the expense of training are able to pay.
Who pays the levy?
The levy is payable by companies at 0.5% of the total annual pay bill. However, each company will receive a £15,000 annual allowance to offset against the amount of levy due so it is only companies with an annual payroll of more than £3 million who will pay anything, since up to that figure, the allowance will exceed the amount of levy due to be paid.
Payroll is defined as the total employee earnings that are subject to Class 1 National Insurance contributions: this includes basic wages, overtime, bonuses, commission and pension contributions. Class 1 National Insurance contributions for apprentices under the age of 25 were abolished for 2016/17 so pay for those apprentices is not included in the payroll figure for that year, which is used to determine whether or not the company pays the levy in 2017/18.
How is the payment calculated?
As noted above, this is a monthly calculation.
In month 1:
Calculate 0.5% of the pay bill for that month.
Divide the annual allowance by 12.
Subtract 2 from 1.
The answer arrived at in step 3 is the levy amount due in month 1 (unless it is negative, in which case no payment is due).
eg: if the paybill in month 1 is £200,000, 0.5% of it is £1,000
Annual allowance (£15,000) divided by 12 is £1,250
£1000 − £1250 = –£250
Therefore, no allowance is due for that month. Since unused allowances are carried forward, the total allowance next month is £1,500.
In month 2:
Calculate 0.5% of total pay bill to date (month 1 + month 2).
Add monthly allowances for year to date, including any carry over.
Subtract 2 from 1.
3 is the amount due in month 2.
The calculation for subsequent months is identical, with the rolling totals used each time.
All records of information used to calculate the levy payment must be kept for at least 3 years.
How is the levy paid?
The levy is reported and paid through the PAYE system each month along with tax and National Insurance so the amount of levy due each month may vary if the monthly payroll varies, eg pay rates are increased, more staff are hired or some are laid off. This means that a fresh calculation has to be made each month of the amount due that month.
Companies with a total pay bill of more than £3 million in 2016/17 and those who believe the bill for 2017/18 will exceed that amount must start reporting from the beginning of tax year 2017/18. If the company pay bill unexpectedly rises to more than £3 million during the course of the year, reporting and payment should start as soon as that happens.
If no levy becomes due at all during the year then no reporting is necessary, but once reporting starts it must continue until the end of the year even if the annual pay bill turns out to be less that £3 million.
What happens to the money?
Unusually, this is a hypothecated fund, that is the levy paid is ring-fenced (for a period, at least) for apprentice training by the levy payer and not added to the Government’s general fund from which all other public spending is taken. Employers who are due to pay the levy must create a digital account on the apprenticeship service and the funds will be paid into this account. These funds will be topped-up by a 10% contribution from the general public funds each month.
While the levy payments are ring-fenced, that only applies for 24 months from the time they enter the account. Any money not spent within that period will revert to the general fund and be lost to the employer. The account operates on a first-in, first-out basis so whenever money is taken out to pay for training, it will always be from the earliest payments in.
What can the money be spent on?
Money in the digital account can only be used to pay for training of apprentices on approved programmes and only up to the funding band maximum for the particular programme. The money cannot be used for any other purpose, even if it is one associated with apprentice training, such as wages, travel and subsistence, work placement programmes or the costs of setting up an apprentice programme.
The apprentices in the scheme who are eligible for funding may be new employees or may be existing employees who need significant new skills and knowledge, although an extra £1000 will be available for any apprentice aged 16–18 to help meet the extra costs associated with supporting young people in the workplace. In any case, the new scheme only applies to those who start the apprenticeship programme after 1 May 2017; funds in the digital account cannot be used to pay for training apprentices who started before that date, who will continue to be funded under the previous arrangements.
There are very detailed conditions under which the funds may be spent and employers should read the apprenticeship funding rules.
How does the employer access the funds in the account?
The employer does not have any access to the actual funds, only the ability to spend them for an approved purpose. The employer uses the “Find apprenticeship training” online service to choose an approved apprentice training provider and agrees a total price and payment schedule, which must include all costs of training and assessment including the end-point assessment.
Funds will then automatically be transferred from the account to the training provider each month in accordance with the schedule. If a monthly payment is in excess of the balance in the account, the employer will have to pay towards the outstanding balance for that month. Through what is called “co-investment” the employer will pay 10% of the balance with the remainder being paid by the Government. However, this Government contribution will only be up to the funding band maximum that applies to the particular apprenticeship programme, anything over that maximum must be paid by the employer.
What support is there for employers who do not pay the levy?
Of course, the overwhelming majority of employers will not pay the levy but they will still be able to draw on Government funds for training apprentices under the “co-investment” model with 90% of the training cost paid by the Government. Smaller employers, those with fewer than 50 employees, will receive 100% Government funding for training apprentices aged 16–18 and in some special circumstances up to age 24. In all cases, the funding band maximum applies and any spending over that amount must be met entirely by the company.
At the moment, employers who don’t pay the levy won’t have a digital account and cannot use the apprenticeship service to pay for training, though this may change after 2018. These employers must use the “find apprenticeship training” service to select an approved training provider, agree a payment schedule and pay their co-investment share directly to the provider. The provider will then be able to claim the remaining 90% from the Government on providing proof that the employer’s share has been paid.
Vocational skill development of the domestic labour force is essential for productivity, competitiveness and resilience in changing times and apprenticeships play a large part. In recent decades, vocational skills development has been somewhat ignored in favour of an unhelpful expansion of higher education, leaving “craft skills” very much in short supply among the indigenous population. It is vital, especially in a situation where the use of imported labour may be restricted, that employers co-operate with the Government to provide the necessary skilled workforce.