If you work through an umbrella company, you might see deductions on your payslips for the Apprenticeship Levy. Here we explain what this charge is and how it is calculated.
What is the Apprenticeship Levy?
UK employers pay the Apprenticeship Levy to fund new apprenticeships and boost investment in vocational skills.
It was first mentioned in the 2015 Budget and introduced in April 2017.
Here are some key facts:
- All employers with annual pay bills of £3m or more must pay the Levy at 0.5% of their total wage bill, minus a fixed annual allowance of £15,000.
- The Levy applies to all earnings subject to Class 1 Employers’ NICs.
- If a company is part of a group, the total group payroll is used to work out the deduction. This rule is designed to prevent companies from creating subsidiaries to avoid paying the Levy.
- Employers pay the Levy through the standard PAYE process, which also deducts income tax and National Insurance.
- An employer can subsequently use any funds in its service account to help fund apprenticeship training for its own staff.
You can read more about the legislation here.
Why am I paying the Levy if I’m an umbrella employee?
This is a very valid question, and one that umbrella employees often ask.
If you’re an employee, why are there deductions for employers’ national insurance and the Apprenticeship Levy on your payslip?
You can read a full explanation here; however, in a nutshell, your umbrella company is your employer.
It must, by law, pay employment taxes on any income generated by its employees’ contract work.
The employer’s costs (National Insurance and the Levy) should be factored into your assignment rate when you start a new contract.
This is different from your pay rate, which is the rate you have agreed to be paid before personal taxes are applied.
The deduction for the Apprenticeship Levy must be displayed on your payslip (probably under ’employment costs’).
It will typically reflect your share of the umbrella company’s overall Apprenticeship Levy liability, calculated as 0.5% of its total payroll subject to the Levy.
It would not be compliant for an umbrella company to deduct the Apprenticeship Levy from a worker’s gross or net pay after the rate has been agreed. The cost must be accounted for within the assignment rate, not passed on as a post-pay deduction.
Why do umbrella companies pay the Apprenticeship Levy?
Before the Levy was first introduced, many contracting industry spokespeople asked for an exemption for umbrella companies.
The reason is that umbrella companies’ payroll figures do not accurately reflect the scale of their businesses. This high turnover of funds merely reflects money passing through. PAYE umbrella firms rarely make stellar profits.
Additionally, umbrella companies rarely benefit from the Levy itself, which is primarily aimed at more vocational occupations.
Unfortunately, no exemptions exist (at the time of writing), so the Levy sits alongside employers’ NICs as another employment cost. These costs are deducted from the assignment rate charged to your agency or client.
Controversies related to the Levy
There have been some examples where employers have been accused of illegally deducting the Levy from employees’ wages.
Unite famously accused employers and umbrella companies of this practice.
However, for umbrella companies, the Levy is a legitimate employment cost, funded by contractors from their pre-agreed assignment rate.
In early 2023, a wide range of leading companies, from retail to technology, called on the Chancellor to urgently reform the rules.
Calling the Levy a £3.5bn mistake, they claim that the government is holding back investment and that the £15,000 (per company) funds can only be used for limited, very specific types of training.
Despite these calls for reform, the core Levy rules and thresholds remain unchanged at the time of writing.
How is the Levy paid to HMRC, in practice?
Employers pay the Levy to HMRC through their Employee Payment Summary (EPS), alongside any other deductions, such as NICs and income tax.
If a company overpays the Levy during the tax year, HMRC will refund the excess via a PAYE credit.
Do limited company contractors pay the Apprenticeship Levy?
No, the Levy only applies to companies with a wage bill of £3m or more.
Unless you’re an incredibly successful limited company contractor with a salary bill above this threshold, this is one rare tax you don’t have to worry about!
UCUK - Special Offer - £10/week umbrella
