The government introduced the Apprenticeship Levy in April 2017. Since then, it’s proved rather contentious amongst contractors, agencies and umbrella companies alike. For instance, some believe those employing overarching contracts should be exempt from the Levy. Others, meanwhile, continue to question the way in which certain agencies and umbrella companies pay for the Levy.
Our comprehensive guide will tell you everything you need to know about the Apprenticeship Levy and how it affects contractors, agencies and umbrella companies.
The Apprenticeship Levy is a small tax levied on UK employers to fund new apprenticeships. It means that all UK businesses with an annual wage bill of more than £3m must pay ½ a per cent of their gross payroll to HMRC.
If separate companies form a group, or ‘company unit’, their total payroll amount will get used for the calculation instead. This prevents companies avoiding the Levy by creating smaller subsidiaries, with wage bills below £3m.
The Apprenticeship Levy applies to UK businesses - both public and private - with an annual wage bill of over £3m. Those companies offering apprenticeships are able to counter balance some of the costs of the Levy when training new apprentices.
The Apprenticeship Levy gets paid through PAYE, alongside a business’s usual tax and National Insurance payments. Once HMRC have received the Levy payment, it is set aside for the training of apprentices. The general idea is that companies who commit to training will get back more than they put in, if they train sufficient numbers of apprentices.
Below is a useful video (made before the introduction of the Levy), discussing how it works in practice.
The Apprenticeship Levy is paid monthly, in a similar way to Income Tax and National Insurance contributions (NICs). There’s more information, here. If a business overpays the Levy during the course of the year, they’ll get PAYE credit by way of a refund. What’s more, according to HMRC, “Apprenticeship Levy payments are a deductible expense for Corporation Tax.”
Your ‘annual wage bill’ includes all payments made to employees (via PAYE) which are subject to Class 1 Employer’s NICs. This includes wages, bonuses and commissions paid to all employees over the age of 16 who earn less than the Lower Earnings Limit and the Secondary Threshold. It also includes apprentices under the age of 25.
Each employer - including those with multiple payrolls - receives an annual allowance of £15,000. This is to offset against their Apprenticeship Levy payments.
Why £15,000? £15,000 is 0.5% (the portion of gross payroll that levied companies must pay to HMRC) of £3m (the ‘Levy-free’ wage bill threshold).
The Apprenticeship Levy doesn’t get paid on the first £3m of a company’s payroll. However, if the payroll of individual companies is linked by a group structure, the £15,000 allowance - or 0.5% of £3m - will only get applied once. Likewise, you cannot carry over any unused allowance into a new tax year.
Here are two ‘examples’ of how the Apprenticeship Levy allowance affects who pays the Levy:
Employer A has an annual wage bill of £4.5m.
• Half a per cent of that is: £22,500.
• Subtracting the Apprenticeship Levy allowance of £15,000 would leave an annual Levy of: £7,500.
• Result = this company needs to pay the Levy.
Employer B has an annual wage bill of £1.5m.
• 0.5% of which is: £7,500.
• By subtracting the Levy allowance from this total, we get an annual Apprenticeship Levy payment of: -£7,500.
• Result = no Levy for them.
Please note, though, that, unlike the Employment Allowance, the Apprenticeship Levy gets paid in monthly instalments (along with certain tax and National Insurance payments) and NOT in one lump sum. So, the examples above simply serve to illustrate the point. Furthermore, the examples above do not account for potential fluxes and influxes to the wage bill over the course of the year - as may have been the case during the recent pandemic, for instance.
For a more detailed look at how the Apprenticeship Levy gets calculated, click here.
The Apprenticeship Levy only applies to a small amount of businesses in the UK, including many umbrella companies. The reason being, their business model involves the processing of contract funds and, in some cases, thousands of payments. So, despite profit levels often not being as high as other companies who pay the Levy, an umbrella company's turnover and ‘wage bill’ tends to be substantial.
Given that its initial aim was to ‘boost investment in vocational skills’, it’s unlikely that an umbrella company - an employment-related business - will see much benefit from the Levy.
For a detailed guide on the calculation of umbrella company contractor pay, click here.
The way in which the Apprenticeship Levy gets applied by agencies and umbrella companies, on behalf of their contractors, remains a source of confusion amongst some industry insiders.
In the past, unions have questioned the legitimacy of the deductions made by agencies and umbrella companies in relation to the Apprenticeship Levy. Their insinuation is that agencies and umbrella companies are ‘immorally’ passing on the cost of the Levy to contractors. And, that they ‘profit’ from the Levy by charging it to their entire workforce, so they can meet the £3m threshold.
In the case of ourselves and other, compliant umbrella companies, these claims are false and unsubstantiated.
To be clear, so long as any Apprenticeship Levy deductions have been explained to and agreed by an employee at the point of on-boarding, they are entirely fair and legal. To get some more perspective on this, here’s the Danbro Group’s Managing Director, Helen Broughton MBE DL, who says it’s wrong to suggest umbrella companies are profiting in any way from the Levy.
“The Apprenticeship Levy increases the costs of employment and this is, appropriately, covered by the income that’s generated from the contract,” she said. “It is untrue to suggest that umbrella companies are gaining a financial advantage from exploiting the Apprenticeship Levy.”
“Compliant umbrella companies fulfil a much needed service, conveying many employment rights to flexible workers, which are not necessarily available to the self-employed.”
“Maintaining and adapting to the various systems and processes which ensure complete compliance with the legislation brings with it additional costs.”
“Transparency is essential to the relationships we build with our clients. So, we ensure that this small deduction is clearly shown on the payslips of all our umbrella employees.”
Umbrella companies pay statutory employment costs from the income they receive from the contractor’s end client or agency. This includes Employer's National Insurance, as well as the Apprenticeship Levy.
If you’re an umbrella company contractor, your Levy payment will be included in the ‘statutory costs of employment’ section of your pay calculation. As such, it gets paid direct to HMRC and appears on your payslip.
When you begin your contract, you should get both an assignment rate and a separate pay rate. Whether or not your pay is uplifted to account for the Levy is at your agency’s / end client’s discretion.
Your assignment rate is the amount paid by your end client for the services you’ve provided. This also includes all the necessary employment costs, such as the Apprenticeship Levy.
Your separate pay rate, meanwhile, is what you’ll receive before personal taxes - such as Income tax & Employees’ NICs - and Employees’ pension contributions get deducted.
It’s also worth stating that, as apprenticeships must last for at least one year and one day, benefitting from the Apprenticeship Levy could prove tricky for a contractor on a temporary contract of under 12 months. By providing continuity of employment, a compliant umbrella company would help with this.
For more information on umbrella companies and how they operate, check out Danbro’s exclusive blog.
The Apprenticeship Levy only applies to companies with an annual payroll of over £3m. Furthermore, the Levy only applies to businesses who pay employees via PAYE, such as umbrella companies. So, sole traders and limited company directors who pay themselves via shares and company dividends do NOT have to pay the Apprenticeship Levy.
If you’re a recruitment agency - or an employment agency - and you:
... You’re expected to pay the Apprenticeship Levy.
We are a compliant, transparent and FCSA accredited umbrella company.
If you’re an umbrella company employee and you have any questions relating to the Apprenticeship Levy or how it affects your employment, please contact your dedicated Payroll team today.
On the other hand, if you’re a self-employed contractor and/or you want to learn more about umbrella company employment, get in touch with our team on 01253 600 140.