Just another “Tax”?!

12 February 2016

As if employer’s haven’t been hit hard enough lately with the introduction of auto-enrolment, the increase to the minimum wage and introduction of the living wage, along comes another cost with seemingly little return – The Apprenticeship Levy, effective 6th April 2017.

What is the apprenticeship levy?

In last year's budget, the government announced its intention to introduce a levy on large employers in order to fund 3 million new apprenticeships in England by 2020. This was part of its commitment to developing vocational skills and to increasing the quantity and quality of apprenticeships.

The government carried out a consultation on the proposed levy in the autumn last year, following which it has now published draft legislation.

The levy is effectively a new tax which will be available to employers to fund apprenticeships.

The levy will be payable by all employers, including charities, in all sectors, across the whole of the UK – regardless of whether they actually employ any apprentices. The levy will be collected through Pay As You Earn (PAYE) and will be payable alongside income tax and National Insurance, with the intention being this would be collected on a monthly basis.

How much will it cost employers?

The levy will be set at 0.5% of an employer's paybill. The paybill will include basic salary and all regular payments, such as bonuses, overtime and day rates etc – basically any earnings that are subject to Class 1 secondary NICs.

All employers will then receive an annual allowance of £15,000 to set-off against the levy, in effect making the levy payable only to the extent that the employer's paybill exceeds £3 million per year. According to the Government, this means that fewer than 2% of employers will pay any levy at all.

Example Calculation;

Employer Wage Bill £5,000,000

Apprenticeship levy £25,000 (5,000,000 x 0.5%)

Less: Annual Allowance (£15,000)

Amount Payable by Employer £10,000

What does this mean for employers?

For those with a paybill in excess of £3 million, the new levy will be an additional cost which will not be fully recoverable through the annual allowance deduction.

In addition, when two or more companies are connected with one another, only one company will be entitled to the annual allowance to be offset against the apprenticeship.

Of course, there will also be the obligatory increase in administration costs for employers which will vary depending on the size of their paybill as there will be detailed record keeping requirements for employers to get to grips with.

In the short term, the levy is likely to increase costs and impact on business growth.

There is also uncertainty for employers in Scotland, Wales and Northern Ireland as apprenticeships are a devolved matter in these countries. Whilst employers in the whole of the UK will have to pay the levy, the government is currently liaising with the devolved administrations over their arrangements for giving employers access to the funding itself.

If you have any concerns on how the apprenticeship levy may affect your business please contact Charlotte Stewart, Integrated Employment Solutions Assistant Manager, charlotte.stewart@aab.uk for more information.

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