Apprenticeship Levy Explained: Benefits & Challenges

The apprenticeship landscape has changed significantly over recent years, providing greater opportunities for individuals to combine work with study to gain skills and knowledge in a controlled environment, and for businesses to benefit from recruiting and developing talent.

The Apprenticeship Levy, introduced in April 2017, is a UK government initiative designed to increase investment in skills development through apprenticeships. Employers with an annual pay bill exceeding £3 million are required to contribute 0.5% of their payroll to the levy, which is held in a digital account. Funds can be used to cover apprenticeship training and assessment costs, with a two-year deadline for utilisation before funds expire.

In this guide, we explain what the apprenticeship levy means for employers.

 

What is the apprenticeship levy?

 

Initiated by the UK government in 2017, the apprenticeship levy is a mandatory tax payable directly to HMRC for all employers paying a wage bill of more than £3 million per year. This tax can then be used by organisations to reinvest back into their business in the form of apprenticeship training, to develop the skills and knowledge of their workforce, and for any unused funds to be used for the benefit other businesses. In this way, the apprenticeship levy is helping the government to increase the quality of apprenticeships, and supports all employers in making long term and sustainable investment in workforce training.

It’s a common misconception that the apprenticeship levy can only be spent on new apprentice recruits and to develop young trainees. The tax levied on employers can in fact be spent on the entire workforce of all ages, including new and existing employees, and at all levels of seniority, from trainees through to company directors. It can also include those who already have university degree qualifications, allowing individuals to gain valuable professional qualifications that would otherwise be paid for commercially by a business.

 

Who has to pay the apprenticeship levy?

 

The apprenticeship levy applies to all employers operating in the UK with an annual pay bill of £3 million or more. This encompasses all payments to employees that are subject to employer Class 1 secondary National Insurance contributions such as wages, bonuses and commissions.

The levy also applies to companies with a payroll bill of less than £3 million a year, if connected to other companies and charities for employment allowance purposes which, when added together, have a combined pay bill of more than £3 million.

Where an employer, either with or without any connected company or charity, exceeds the £3million threshold, they will need to pay the apprenticeship levy, even if they contribute to an industry-wide training levy arrangement. Employers not connected to another employer with a pay bill below £3 million, or with a combined pay bill of less than £3 million, will not need to pay the levy. Non-levy employers will still be able to access government funding to help pay for apprenticeship training, although they will be required to make a small percentage contribution towards this cost. This is referred to as ‘co-investment’.

 

How much is the apprenticeship levy?

 

Employers that meet the £3 million criterion, either individually or when combined with connected companies or charities, are required to pay 0.5% of their annual bill each month as a levy tax. The apprenticeship levy is an annual tax charge, but employers should report and pay the relevant proportion of it monthly, alongside their other PAYE liabilities. The monthly calculation of levy liability is based on an employer’s total pay bill for the tax month.

However, all employers will have a levy allowance of £15,000 per year which can be offset against their apprenticeship levy bill. For example, an employer with a yearly pay bill of £5 million will be charged an apprenticeship levy of £10,000 (0.5% x £5,000,000 – £15,000 = £10,0000). Connected companies or charities will need to share the £15,000 allowance between them, although employers can offset an agreed proportion of that allowance. This division must be agreed with HMRC and remain unchanged for the year. The allowance must also be used within the year, where any unused allowance cannot be carried over.

An employer must report to HMRC how much apprenticeship levy they owe each month. They must report this at the start of the tax year if their annual pay bill, including connected companies or charities, in the previous tax year was in excess of £3 million or if they think their annual pay bill will be greater than £3 million. If their annual pay bill unexpectedly increases to more than the threshold, the employer must start reporting when this happens.

If the employer has started paying the apprenticeship levy, they must continue to report and pay it, even if their annual pay bill turns out to be less than £3 million. If the levy has been overpaid during the year, the employer will receive a refund as a PAYE credit.

 

How does the apprenticeship levy work?

 

Apprenticeships are managed and funded using the apprenticeship service. This is the government portal run by the Education and Skills Funding Agency (ESFA), where all employers hiring apprentices will need to set up an online EFSA apprenticeship service account in which funds will be deposited for use in apprenticeship training.

Employers paying the apprenticeship levy can access the money paid to HMRC to buy training from providers who appear on the new register of training providers. Levy-paying employers can also use their online account to transfer a maximum of 25% of their unused annual funds to help other employers. For smaller non-levy employers, an EFSA apprenticeship service account can be used to reserve funding or to accept transferred funds from other employers.

All employers using the apprenticeship service account will also be required to sign a contract with EFSA, agreeing to their terms and conditions. The employer must agree to:

 

• only use the funding made available through their apprenticeship service account to train and assess apprentices
• have a contract with their training provider, so the provider can carry out apprenticeship training
• follow the apprenticeship funding rules.

 

How does apprenticeship funding work?

 

How much apprenticeship funding is received by an employer, and how this funding works, will depend on whether or not the employer pays the apprenticeship levy.

 

Levy-paying employers

 

How an employer gets their funds and pays for training depends on whether they’re in England, Scotland, Wales or Northern Ireland. For employers paying the levy based in England, they will receive funds on a monthly basis to spend on training and assessing apprentices. The amount of apprenticeship funding that will enter their account is calculated by the levy they declare to HMRC, multiplied by the proportion of the pay bill paid to staff living in England, plus a 10% government top-up on this amount.

Funds must be used within 24 months from the date they enter the employer’s account, before being reallocated to other businesses. Any unused levy funds will be used to support new starts with non-levy paying employers, new starts with levy-paying employers who spend more than the funds available in their accounts, and existing apprenticeship learners.

If a levy-paying employer depletes their apprenticeship funds, they automatically switch to the co-investment model. Under this arrangement, the government funds 95% of the training and assessment costs (up to the funding band maximum), with the employer covering the remaining 5%.

 

Non-levy paying employers

 

For apprenticeships starting on or after 1 April 2024, the government will fund 100% of the apprenticeship training costs, up to the funding band maximum, for apprentices aged between 16 and 21 at the start of their training.

For apprentices aged 22 and above, non-levy employers are required to contribute 5% towards the cost of apprenticeship training, with the government covering the remaining 95%.

Non-levy employers will need to reserve funds in the ‘finance’ section of their apprenticeship service account before starting an apprentice.The reservation period is 6 months, allowing employers to reserve funds for up to 6 months in advance of the apprenticeship start date. However, funding is paid directly to the training provider, and employers only see their contribution requirements. The funding will be paid directly by the government to the training provider. The employer will then be required to pay their percentage contribution.

Employers may receive additional payments, such as £1,000 for hiring apprentices aged 16 to 18, or those aged 19 to 24 with an education, health and care plan, or who have been in the care of their local authority.

Non-levy-paying employers can access government funding for apprenticeship training and assessment by creating an apprenticeship service account and reserving funds. Alternatively, they can authorise their training provider to reserve funds on their behalf. Reservations ensure funding certainty and help manage the affordability of the apprenticeship programme for these employers.

Employers can reserve funds up to three months before the apprenticeship’s planned start date. If this is not possible, reservations can be made within one calendar month of the start date. Reservations expire three months after the reservation month if apprenticeship details are not fully completed and approved. Unused reservations can be deleted.

Once a reservation is made and approved, funds for the apprenticeship are guaranteed, provided eligibility criteria and funding rules are met. However, apprenticeships funded through levy fund transfers do not require reservations. The government may monitor and pause reservations during the financial year to ensure the programme’s affordability.

 

Key considerations when hiring apprentices

 

Under the apprenticeship funding rules, apprentices must work towards an approved apprenticeship standard, and be employed in a genuine job that gives them the opportunity to gain the technical knowledge, practical experience and wider skills they need to pass their end assessment. Their training must last for a minimum of 12 months, and at least 20% of their normal working hours must be spent on formal off-the-job training.

The employer will be responsible for providing a contract of employment and for paying their apprentice’s wage. They must pay an apprentice at least the relevant National Minimum Wage level, where the employer cannot use their apprenticeship funds to cover this cost. The employer will also be responsible for providing an apprenticeship agreement, to confirm the apprentice’s employment arrangements, and a signed commitment statement. A commitment statement, sometimes known as a training plan, is to be signed by the employer, apprentice and training provider, setting out the plan for the agreed training and how all three parties will work towards the successful completion of the apprenticeship.

Apprenticeships are managed in partnership with a training provider, and assessed by an end-point assessment organisation. To access government funding, the provider must ensure that both the individual and programme are eligible for funding by conducting an initial assessment of the individual’s abilities in line with the proposed apprenticeship, and that the training programme aligns with an approved apprenticeship standard.

 

Benefits of hiring apprentices

 

Apprenticeships have become more important than ever in helping businesses to recruit the right people and develop the skills needed to move forward. They can be used to:

 

• complement an employer’s existing training provision
• upskill the employer’s existing workforce
• provide greater career development opportunities
• attract future talent and support succession planning
• enhance employee satisfaction and improve retention rates

 

Hiring an apprentice involves a number of considerations and costs for employers, but it can pay real dividends, ensuring that staff have exactly the right skillset and knowledge to sustain and progress the employer’s business.

Non-levy employers, or levy-paying employers who want to invest more in apprenticeship training than is available in their accounts, now benefit from significant government funding to support their commitment to apprenticeships. In recognition of the significant value that apprenticeships can bring to UK businesses and to the wider economy, additional financial help may also be available from the government, such as a £1,000 payment for hiring apprentices who, at the start of their apprenticeship training, are aged 16 to 18 years old, or aged 19 to 24 years old with an education, health, and care (EHC) plan provided by their local authority and/or have been in the care of their local authority. This payment is intended to help with additional costs associated with training young apprentices.

 

Leveraging Apprenticeships for Workforce Planning & Development

 

Employers can use apprenticeships and the apprenticeship levy system strategically to optimise their recruitment and workforce planning while addressing skill shortages and long-term talent development. Apprenticeships allow businesses to train employees in line with specific job roles and company objectives, ensuring that new hires develop the exact skills needed to excel in their positions, and by integrating apprenticeships into their recruitment strategies, employers gain access to a pool of motivated individuals eager to learn and contribute to the organisation.

Incorporating apprenticeships into workforce planning helps employers build a talent pipeline tailored to future business needs. Apprenticeships offer a structured pathway for employees to gain nationally recognised qualifications while contributing to the organisation’s growth, and reducing staff turnover, as apprentices often develop a strong connection to the organisation.

Employers can also use apprenticeships to upskill or reskill existing employees, aligning their workforce with evolving industry demands or technological advancements. This proactive strategy reduces the need for external recruitment and supports internal career progression, increasing employee engagement and satisfaction.

Levy-paying employers have the advantage of accessing funds set aside through their apprenticeship levy contributions to cover the cost of training and assessment for apprentices. Employers can use these funds to offset the costs of developing new talent and reinvest in their workforce. Employers can also transfer up to 25% of their unused levy funds to smaller businesses or charities, creating opportunities for collaborative talent development and strengthening industry partnerships.

Non-levy-paying employers benefit from substantial government support, including co-investment schemes where the government covers 95% of training costs. This makes apprenticeships an affordable and practical option for businesses of all sizes. Employers can also target specific demographic groups, such as young people or individuals seeking career changes, to address diversity goals and attract a broader range of talent.

 

 

Apprenticeship levy FAQs

 

What is the apprenticeship levy?

The apprenticeship levy is a tax introduced by the UK government to fund apprenticeship training. Employers with an annual pay bill over £3 million are required to pay 0.5% of their total payroll into the levy, which can then be used to train apprentices.

 

Who is required to pay the levy?

Employers with a payroll bill of £3 million or more, or smaller employers connected to others with a combined pay bill exceeding £3 million, are required to pay the levy.

 

What happens to unused levy funds?

Levy funds must be used within 24 months of being deposited into an employer’s apprenticeship service account. Unused funds are reallocated to support apprenticeship programmes for other employers.

 

Can non-levy employers access apprenticeship funding?

Non-levy employers can access government funding through a co-investment model, where the government covers 95% of the training costs. They can also reserve funding through the apprenticeship service.

 

What is co-investment?

Co-investment is a funding model where non-levy employers contribute 5% towards the cost of apprenticeship training, with the government covering the remaining 95%, up to the funding band maximum.

 

Are there any additional payments available?

Employers may receive a £1,000 payment for hiring apprentices aged 16 to 18 or apprentices aged 19 to 24 with specific additional needs or who have been in care.

 

What happens if my apprenticeship funds run out?

Levy-paying employers who deplete their funds automatically switch to a co-investment model, where they pay 5% of training costs and the government funds the remaining 95%.

 

Can I transfer my levy funds to other employers?

Levy-paying employers can transfer up to 25% of their annual levy funds to other employers, such as smaller businesses or charities, to support their apprenticeship programmes.

 

Do I need to reserve funds for apprenticeships?

Non-levy employers must reserve funds through the apprenticeship service before starting an apprenticeship. Funds can be reserved up to three months in advance of the planned start date.

 

What if my apprentice’s training costs exceed the funding band maximum?

Employers are responsible for paying any costs above the funding band maximum directly to the training provider.

 

Can I change or cancel a reservation?

Employers can delete unused reservations in the apprenticeship service account if they no longer need them. Reservations expire if apprenticeship details are not fully completed and approved within three months.

 

Glossary

 

Term	Definition
Apprenticeship Levy	A tax on UK employers with a pay bill over £3 million, used to fund apprenticeship training and assessment.
Pay Bill	The total amount of wages, bonuses, commissions, and other payments subject to employer Class 1 National Insurance.
Levy Allowance	An annual £15,000 allowance that reduces the amount of levy an employer needs to pay.
Apprenticeship Service	A digital portal run by the ESFA, used by employers to manage apprenticeship funding and training.
ESFA	Education and Skills Funding Agency, responsible for overseeing apprenticeship funding and support.
Funding Band	The maximum amount of funding available for a particular apprenticeship standard, set by the government.
Co-Investment	A funding model where the government pays 95% of training costs, and non-levy employers pay the remaining 5%.
Reservation of Funds	The process of setting aside government funding for apprenticeship training before starting an apprentice.
Levy Fund Transfer	The ability for levy-paying employers to transfer up to 25% of their unused levy funds to other organisations.
Funding Expiry	Unused levy funds expire 24 months after being added to an employer’s account, and are reallocated to other programmes.
Apprenticeship Standard	The approved framework that outlines the training and skills an apprentice must achieve in a specific occupation.
Eligibility Criteria	Conditions that apprentices, employers, and training providers must meet to access government funding.
Commitment Statement	A document outlining the agreement between the apprentice, employer, and training provider on the apprenticeship’s details.
Small Employer Waiver	A rule where employers with fewer than 50 employees do not pay the 5% co-investment for certain apprentices.
Incentive Payment	Government funding provided to employers for hiring apprentices under specific criteria, such as age or circumstances.
Training Provider	An organisation approved to deliver apprenticeship training and assessment, selected by employers through the service.
Top-Up Funding	The additional 10% added by the government to levy funds allocated in an employer’s apprenticeship service account.