How Do I Contribute to the Apprenticeship Levy?
Like Income Tax and National Insurance contributions, the Apprenticeship Levy is paid monthly. Find out more on PAYE bills, here. Apprenticeship Levy payments can be deducted from taxable profits when calculating Corporation Tax.
What Is My ‘Annual Wage Bill’?
Your annual wage bill is the total amount paid from a company to employees in a year (via PAYE), which are subject to Class 1 Employer’s NICs. This includes salaries, bonuses and commissions paid to employees aged 16 and over.
This is applicable even if they earn below the Lower Earnings Limit or the Secondary Threshold. This also applies to apprentices under the age of 25.
What Is the Apprenticeship Levy Allowance?
Each employer, including those with multiple payrolls, receives an annual £15,000 allowance to offset their Apprenticeship Levy payments.
The £15,000 allowance ensures that smaller businesses don’t have to pay the Apprenticeship Levy, while larger businesses contribute based on the portion of their wage bill that exceeds £3 million. Since £15,000 is 0.5% of £3 million, the first £3 million of a company’s payroll is effectively exempt from the Levy. This ensures that companies are only making Apprenticeship Levy contributions on their profit over £3 million.
If the payroll of individual companies is linked in a group structure, then the £15,000 allowance will only be applied once. A company also cannot carry over any unused allowance into a new tax year.
How Does the Allowance Impact Which Companies Must Pay?
The Apprenticeship Levy calculation below demonstrates how the Apprenticeship Levy allowance works and which companies must pay.
Employer A has an annual wage bill of £6 million.
- 0.5% of this amount is £30,000.
- After applying the £15,000 Apprenticeship Levy allowance, the remaining annual Levy is £15,000.
- Conclusion: This company is required to pay the levy.
Employer B has an annual wage bill of £2 million.
- 0.5% of this amount is £10,000.
- When the £15,000 allowance is subtracted, it results in a negative amount, meaning no levy is due.
- Conclusion: This company does not need to pay the levy.
These adjusted examples highlight how larger employers with a wage bill over £3 million contribute to the Apprenticeship Levy, while smaller employers are exempt. However, it’s important to note that, unlike the Employment Allowance, the Apprenticeship Levy is paid in monthly instalments along with certain tax and National Insurance payments, not as a lump sum. The examples are meant to illustrate the concept and do not account for fluctuations in the wage bill over the year, such as those caused by events like the recent pandemic.
The Apprenticeship Levy and Its Connection to Umbrella Companies
The Apprenticeship Levy applies to a relatively small percentage of businesses in the UK, including many umbrella companies. These companies often fall under the Levy due to their unique business model. Typically, umbrella companies manage large sums of contract funds and handle payments for numerous workers. As a result, their annual wage bill can be substantial, even if their profit margins are slimmer compared to other companies that pay the Levy.
It is untrue to suggest that umbrella companies are gaining a financial advantage from exploiting the Apprenticeship Levy.
Helen Broughton MBE DL
Because of the size of their payroll, umbrella companies are liable to pay the Apprenticeship Levy. This is despite the fact that their core business doesn’t directly benefit from the training incentives that the Levy promotes.
The Apprenticeship Levy was designed to encourage investment in vocational training and skills development across the UK workforce. However, umbrella companies—which primarily act as intermediaries for contractors—are less likely to see a direct return on this investment. Unlike businesses that employ apprentices or offer vocational training programs, umbrella companies typically do not operate in a way that aligns with the Levy’s objectives.
Consequently, for umbrella companies, the Apprenticeship Levy may result in higher operational costs without providing significant access to training opportunities. This makes the impact of the Levy less advantageous for umbrella companies compared to other businesses in industries where vocational training plays a more central role.
How the Apprenticeship Levy Affects Umbrella Company Contractors
The application of the Apprenticeship Levy by agencies and umbrella companies, on behalf of their contractors, continues to cause confusion for some industry insiders.
When joining a compliant umbrella company, Apprenticeship Levy deductions should be clearly explained to the employee and agreed upon. Although, in the past, unions have questioned the legitimacy of umbrella companies and agencies making these deductions from contractors, they are entirely fair and legal. For further insight, Helen Broughton MBE DL, Managing Director of the Danbro Group, emphasises that it is misleading to suggest umbrella companies are profiting from the Apprenticeship Levy in any way.
“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.”
Why Umbrella Company Contractors Are Charged the Apprenticeship Levy
Umbrella companies cover statutory employment costs using the income they receive from the contractor’s end client or agency. These costs include Employer’s National Insurance and the Apprenticeship Levy.
If you’re a contractor working through an umbrella company, your Levy contribution will be listed under the “statutory costs of employment” in your pay calculation. This amount is paid directly to HMRC and will be reflected on your payslip.
When starting a contract, you will receive both an assignment rate and a separate pay rate. Whether your pay is adjusted to account for the Levy depends on the discretion of your agency or end client.
- 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 important to note that apprenticeships must last at least one year and one day. This makes it difficult for a contractor on a temporary contract of less than 12 months to benefit from the Apprenticeship Levy. However, a compliant umbrella company that provides continuous employment could help overcome this challenge.
Do Limited Company Contractors or Directors Have to Pay?
The Apprenticeship Levy is applicable only to companies with an annual payroll exceeding £3 million. Additionally, it only affects businesses that pay employees through PAYE, like umbrella companies. This means sole traders and limited company directors who compensate themselves through shares and dividends are exempt from paying the Apprenticeship Levy.
Does the Apprenticeship Levy Apply to Recruitment Agencies?
Recruitment Agencies and Employment Agencies which:
- Supply labour to a client
- Pay Class 1, secondary NICs on the earnings of those workers
- Have an annual wage bill exceeds the £3million threshold
…will pay the Apprenticeship Levy.
There’s a lot to understand about the apprenticeship levy, from how it’s calculated to who it applies to and why it exists. Hopefully, this article has provided you with a clear overview of how the apprenticeship levy works.