Planning for the apprenticeship levy

13 December 2016

Heather Wheelhouse

Driven by its ambitious target of funding three million new apprenticeship roles in England by 2020, last year the government introduced plans to expand apprenticeships through the introduction of the apprenticeship levy. Although we expect the design of the system will continue to evolve before its introduction in April 2017, the government has recently released further detail as to how it will work, (with additional guidance to be provided in due course by the devolved governments in Scotland, Wales and Northern Ireland on how their share of expenditure met from the levy can be accessed).

Basis of payment

The levy is to apply to employers in all sectors across the UK based on 0.5 per cent of their total pay bill. Pay bill is defined as the total amount of earnings subject to employer’s class 1 national insurance contributions (NICs), including those earnings falling below the secondary threshold. Benefits that have traditionally been reported on forms P11D or in a PAYE settlement agreement will not be considered in the calculation as they attract NICs under class 1A or 1B.

Against this, there is an allowance available to each stand-alone employer of up to £15,000 per annum to set against the levy. This means that only employers with a total annual pay bill in excess of £3m will ultimately bear a cost. Connected employers, however, will only have one allowance available to the ‘group’ and they must decide how this is to be allocated.

The levy will be collected through the PAYE (Pay As You Earn) process and will be calculated on a monthly cumulative basis. Schools with a pay bill over £2.8m in the preceding tax year, or if the expectation is that the current year bill will exceed £3m, a report to HMRC will need to be made in case the threshold limited is reach.

With a heavy dependency on the staff, independent schools will typically have a pay bill well in excess of £3m, and the additional 0.5 per cent cost will be seen by some as an extra tax and therefore a bitter pill to swallow.

Planning for the levy

In preparation, you need to make an early assessment of all earnings attracting a class 1 NICs liability, whilst planning for any anticipated growth to your pay bill before next April, to know how the new levy will impact you. 

You may want to give consideration to your reward strategy in light of this new charge. For example, where there is a strong commercial rationale for alternative forms of reward, there may be a consequential benefit in reducing the apprenticeship levy liability where:

  1. benefits in kind, that attract NICs charges under class 1A or 1B (and which currently already have the advantage of attracting zero employee’s NICs), are provided rather than salary; and
  2. salary sacrifice arrangements, which may allow remuneration packages to be structured in a more tax and/or NICs efficient way, are used - salary sacrifice in favour of employer pension contributions brings savings in class 1 NICs liabilities to both employees and the employer.

Such changes could therefore bring added benefits by lowering an employer’s class 1 NICs and, by consequence the levy. However, certain arrangements for which the main purpose, or one of the main purposes is to avoid or reduce the apprenticeship levy may be counteracted by anti-avoidance rules, so care is needed. Your school must also remain mindful of the government’s recent consultation on restricting the use of many salary sacrifice arrangements, but we note it has pledged to not challenge such arrangements in relation to employer supported child care, pensions and cycle to work schemes. 

Using the levy as an opportunity

The levy is not necessarily all bad news for those making payments, as you will be able to access funding through a digital apprenticeship service account which can be linked to their PAYE scheme. Please note, however, that although the levy will be applied to the pay bill for all UK employees, the digital account service will only support the English apprenticeship system. We do not, as yet, have detail as to how funds set aside for Scotland, Wales and Northern Ireland will be spent. 

Under the English system, the levy can be used to benefit the workforce and cover apprenticeship training (not salaries) for new or existing staff. All employers will receive a 10 per cent top up on their digital account from the government so that an employer can recover more from the scheme than the payments they make through the levy. Funds entering the digital account will expire within 24 months (allocated on a first in first out basis) and there will be a cap placed on funding for a single employee, so early planning to maximise utilisation of funds is advisable.

The key areas to consider and best practice example are detailed in the full report.