How The Apprenticeship Levy Works

This guide to the apprenticeship levy is kindly provided by Barry Langfield, Vice Principal Development and Planning, Lewisham and Southwark College.

Introduction

Apprenticeships are currently in a process of transition from Apprenticeship frameworks through Trailblazers, and on to Apprenticeship Standards.

The governments apprenticeship reform programme is aiming to deliver more and better quality apprenticeships with an overarching aim of boosting the skills of the workforce and to improve economic productivity.

These reforms include changing the way apprenticeships in England are paid for, underpinned by a new apprenticeship levy, to be paid by larger employers from April 2017. The levy will lead to employers having more influence over how apprenticeships are designed and paid for. This will encourage employers to seek out high quality, relevant training that meets their needs.

Employers in all sectors will need to pay the apprenticeship levy if they have a pay bill of more than £3 million each year. The vast majority of employers will not be eligible to pay the levy and these employers will continue to benefit from government support to pay for apprenticeship training.

The new Apprenticeship Standards seek to:

  • Put employers in the driving seat;
  • Increase the quality of apprenticeships;
  • Simplify the system;
  • Give employers purchasing power.

Paying The Apprenticeship Levy

Paying the apprenticeship levy applies to all employers who operate in the UK.

Employers, in any sector, with a pay bill of more than £3 million each year will be required to pay the levy.

For the purposes of the levy, an ‘employer’ is someone who is a secondary contributor, with liability to pay Class 1 secondary National Insurance Contributions for their employees.

The levy will be charged at a rate of 0.5% of an employers annual pay bill. All employers will have a levy allowance of £15,000 per year to offset against the levy they must pay. This means employers will only pay the levy if their pay bill exceeds £3 million in a given year.

HM Revenue and Customs will collect the levy through the Pay as You Earn process.

What counts as the pay bill?

An employers pay bill will be based on the total amount of earnings subject to Class 1 secondary National Insurance Contributions. Although earnings below the secondary threshold are not counted when calculating an employer’s National Insurance Contributions, they will be included for the purposes of calculating the amount of levy the employer needs to pay.

Earnings include any remuneration or profit coming from employment, such as wages, bonuses, commissions, and pension contributions that employers pay National Insurance Contributions on. The levy is not charged on other payments such as benefi ts in kind, subject to Class 1A National Insurance Contributions.

Calculating what employers have to pay

Employers will pay the levy on their entire pay bill at a rate of 0.5%. However, they will have a levy allowance to offset against this. The levy allowance is worth £15,000 for each tax year. This means the apprenticeship levy is only payable on pay bills over £3 million.

The levy allowance will operate on a monthly basis and will accumulate throughout the year. This means employers will have an allowance of £1,250 a month.

Any unused allowance will be carried from one month to the next.

If an employer has multiple Pay As You Earn schemes and does not use the full £15,000 allowance, they will be able to offset the unused amount against another one of their schemes once the tax year has ended.

The levy allowance will operate on a monthly basis and will accumulate throughout the year. This means employers will have an allowance of £1,250 a month.

How to pay the levy?

Employers will calculate, report and pay their levy to HMRC, through the Pay as You Earn process alongside tax and National Insurance Contributions.

Once the employer has calculated that they will pay the apprenticeship levy, they will need to declare this and include it in their usual Pay As You Earn payment to HMRC.

Corporation Tax deduction

Any apprenticeship levy payment to HMRC will be allowable for Corporation Tax.

Calculating the levy for connected companies or charities

Where a group of employers are connected they will only be able to use one £15,000 allowance.

If an employer is part of a group of connected employers, they must decide what proportion of the levy allowance each employer in the group will be entitled to. This decision must be taken at the beginning of the tax year and will be fi xed for that tax year, unless a correction is necessary because the total amount of the levy allowance claimed across the group exceeds £15,000. Each employer in the group will then calculate what they have to pay through the same processes set out above, but using only their portion of the £15,000 levy allowance.

Employers who already pay into an existing industry levy scheme

Some industries already operate levy systems (e.g. the Industry Training Boards for the construction, engineering construction and fi lm industries), or
other collective training arrangements. If an employer already contribute to one of these, they will still be required to pay the apprenticeship levy.

Accessing money paid under the apprenticeship levy

Once employers have declared the levy to HMRC they will be able to access funding for apprenticeships through a new digital apprenticeship service account.

Employers will be able to use this to pay for training and assessment for apprentices in England. The service will also help employers find training providers to help them develop and deliver their apprenticeship programme.

Separate arrangements will be in place for Scotland, Wales and Northern Ireland.

Creating an account to access funds

Online tools for employers will be available via the digital apprenticeship service over the next year.

Employers will be able to register to create an account from January 2017.

When funds will appear in the digital account

The apprenticeship levy will be introduced on 6 April 2017. The first time eligible employers will have to declare their liability to HMRC will be in May 2017 for levy due on their April payroll. Levy-paying employers will be able to see corresponding funds in their digital accounts shortly after their final declaration to HMRC, so after 22 May.

The government is proposing that the new system for funding apprenticeships comes into effect from 1 May 2017. Any apprenticeships started from this date will be funded according to the new rules. Until this date, the funding system in place for frameworks and standards will continue to operate.

Employers who operate in England and other parts of the UK

The levy will apply to employers across the UK. The amount entering the employers digital apprenticeship service account will be how much they have available to spend on apprenticeship training in England.

Apprenticeships are a devolved policy, which means that authorities in each of the UK nations manage their own apprenticeship programmes, including how
funding is spent on apprenticeship training.

The digital apprenticeship service will support the English apprenticeship system. Scotland, Wales and Northern Ireland have their own arrangements for supporting employers to access apprenticeships.

The Government will use existing data on employers to work out what proportion of their pay bill is paid to employees living in England. The Government will make this assessment in early 2017.

Top-ups to the funds in the digital account

The government will apply a 10% top-up to the funds employers have for spending on apprenticeship training. The government will apply the top-up
monthly, at the same time the funds enter the employers digital account.

That means for every £1 that enters an employers digital account to spend in England on apprenticeship training, the employer gets £1.10.

Expiry of funds in the digital account

Funds will expire 24 months after they enter an employers digital account unless they spend them on apprenticeship training. This will also apply to any topups in the digital account. For example, funds entering an employers account in September 2017 will expire in August 2019, unless they have been spent. Money is spent when it leaves an employers digital account as a payment to a training provider.

The account will work on a first-in, first-out basis, through either payment or expiry. Whenever a payment is taken from the digital account it will automatically use the funds that entered the account first. This will minimise the amount of expired funds.

Understanding the Apprenticeship Levy - Download the complete report.

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