The apprenticeship levy: why did half of UK firms return their money?

Back in 2017, the apprenticeship levy system was introduced to improve the availability of apprenticeships. It allows employers to participate in a 2.5 billion government fund that would cover 100% of the National Minimum Wage (NMW) for 25 hours a week.

However, the scheme hasn't kicked off to a great start. 

Some experts such as Lizzie Crowley, the senior skills adviser at the CIPD, went as far as to say that the levy system had “clearly failed” and requires significant reforms to provide the kind of flexibility employers truly needed.

A poll of 500 HR professionals conducted by Survation also revealed that 48% of firms have already returned unspent apprenticeship levy funds having not used them within the 24 month period employers have to spend the levy. The research also indicated that employers weren’t too keen on the system, with 1 in 5 respondents saying they didn’t feel the scheme was ‘currently working well’.

But what exactly is the apprenticeship levy? And what are some of the reasons it's not worked out? PayFit explains.

What is the Apprenticeship Levy?

The Apprenticeship Levy is a tax which employers can use to fund apprenticeship training and qualifications. 

Who needs to pay the Apprenticeship Levy?

All employers who have a National Insurance contribution (NIC) bill of more than £3 million at the time of this program are required to pay the levy. It's applicable even if the employer does not employ apprentices.

How much Apprenticeship Levy do companies pay?

The Apprenticeship Levy is calculated as 0.5% of an employer’s NIC bill less the annual allowance of £15,000. 

What happens to funds deducted via the Apprenticeship Levy?

Funds deducted under the Apprenticeship Levy are held in an account under the online apprenticeship service. Employers who pay the Apprenticeship Levy can register for this service on the government website. 

HMRC will also subsequently top up an employer’s Apprenticeship Levy fund by 10%.

What about employers who do not pay the Apprenticeship Levy?

Once the money had been added to the account, employers had 24 months to use the funds. 

Any funds left unused after that period are then transferred to smaller employers who do not pay towards the levy so they too can gain access to training funds for employees. 

Furthermore, any employer liable for the levy can transfer up to 25% of their funds to other employers. 

As well as this, smaller employers who do not contribute only have to pay 5% of their training costs, with government grants covering the rest on eligible training and qualifications.

How do businesses use their Apprenticeship Levy funds?

The funds are used to cover a variety of business expenses, such as training costs or paying for HMRC-recognised apprenticeship courses and qualifications. Some larger employers also use funds towards supply chain costs. 

What are the results so far?

The scheme, though well-intended, has come up against a number of challenges. Here are some of the top difficulties employers reported:

The deadline is too soon - Over a third of businesses surveyed felt the deadline for spending was set too soon. Respondents also felt levy funds would be better spent if the deadline had been extended from two to three years.  

The levy doesn’t cover wage costs - A similar percentage said they would have used more levy funds if they had been allowed to cover wage costs of new apprentices. They would prefer an incentivisation to convert these placements into longer-term apprenticeships. 

The scheme isn’t flexible enough - A quarter of those surveyed also felt the scheme would work better if larger companies could transfer more funds to smaller SMEs. Even more companies indicated they’d have transferred additional funds if the limit had been increased. 

Experts like Simon Ashworth, director of policy at the Association of Employment and Learning Providers (AELP), believe that fewer funds would have been returned unspent if the scheme was more accessible to smaller employers who could have utilised the funds.

Final verdict 

While well-intended, it has become clear that the apprenticeship levy needs significant reforms in order to deliver the kind of value employers can truly benefit from.