Umbrella company contractors – what is the Apprenticeship Levy?

If you’re working through an umbrella company, you may have noticed deductions on your payslip for the Apprenticeship Levy. Here we explain what this charge is, and how it is calculated.

What is the Apprenticeship Levy?

First announced at the Summer Budget 2015, the Apprenticeship Levy came into effect from April 2017. It is a levy on UK employers to fund new apprenticeships – which will boost investment in vocational skills.

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 pay bill, minus a fixed £15,000 annual allowance.

The Levy applies to the sum of all earnings subject to Class 1 Employers’ NICs.

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 find out more about the detail of the legislation here.

Why am I paying the Levy if I’m an umbrella employee?

This is a very valid question, and one often asked by umbrella employees. 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, and 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 should umbrella companies have to pay the Apprentice Levy?

When the Levy was first introduced, many in the contracting industry believed that there should be an exemption for certain employment-related business – as their payroll figures don’t fairly represent the scale of their businesses. Umbrella companies and recruitment agencies, in particular, have very high payroll numbers, but this is merely money passing through.

In addition, it does seem unlikely that employment-related businesses will 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 tax’ which is deducted from the rate charged to your agency or client.

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