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?
The Apprenticeship Levy is paid by UK employers 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 a rate of 0.5% of the company’s total wage bill, minus a fixed £15,000 annual allowance.
- The Levy applies to the sum of all earnings that are 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 exists to stop companies from creating subsidiaries to avoid paying the Levy.
- Employers pay the Levy via the standard PAYE process, which also includes deductions for 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 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 – 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 should equal 0.5% of your gross pay.
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 – umbrella companies’ payroll figures don’t fairly represent the scale of their businesses. This high turnover of money merely represents funds passing through. PAYE umbrella firms rarely make stellar profits.
In addition, umbrella companies rarely benefit from the Levy itself – which is 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 – in the case of umbrella companies – the Levy is a legitimate employment cost, funded by contractors out of their pre-agreed assignment rate (see above).
In early 2023, a wide variety 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.
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 extremely successful limited company contractor, with a salary bill above this threshold, this is one rare tax you don’t have to worry about!