For employers, developing talent is more crucial than ever. The apprenticeship levy, introduced by the UK government in 2017, represented a significant shift in how apprenticeships are funded and delivered across the country. For many larger organisations, understanding the levy is essential for strategic workforce planning and maximising the return on their investment, but just what is the apprenticeship levy?
In this blog post, we’ll demystify the apprenticeship levy and explain its core principles, including how you can use it to cultivate talent in your team.
What is the apprenticeship levy?
The apprenticeship levy is a UK government initiative designed to fund apprenticeship training and address skills gaps in the workforce. Implemented in April 2017, the levy fundamentally changed how apprenticeships are funded in England, creating a system where larger employers contribute directly to a national apprenticeship funding pot.
At its core, the levy is a tax on UK employers specifically earmarked for apprenticeship training. It was introduced with the dual purpose of increasing the quantity and quality of apprenticeships while placing greater control in the hands of employers.
The levy represented part of a broader government strategy to improve productivity, address skills shortages, and create more opportunities for people to train while they work. It’s designed to encourage employers to invest in their workforce through apprenticeship programmes, which combine practical training with study.
Who pays the apprenticeship levy?
Not all employers are required to pay the apprenticeship levy, as the requirement is based on the size of an organisation’s payroll:
The levy applies to employers with an annual pay bill of more than £3 million. This threshold applies across all sectors, including both private and public sector organisations.
It’s important to note that for calculating the levy, groups of companies under common ownership are treated as a single entity. This prevents larger organisations from avoiding the levy by restructuring into smaller companies.
Smaller employers with an annual pay bill below £3 million are exempt from paying the levy but can still access apprenticeship funding: Apprenticeships for those aged under 22 are 100% government-funded and apprenticeships for those aged 22 and over are 95% government-funded.
How does the apprenticeship levy work?
The mechanics of the apprenticeship levy involve several key components:
- The levy is charged at a rate of 0.5% of an employer’s annual pay bill. However, all employers receive an annual allowance of £15,000 to offset against their levy payment. This effectively means that only employers with a pay bill exceeding £3 million will pay the levy (as 0.5% of £3 million is £15,000).
- The levy is collected monthly through the Pay As You Earn (PAYE) system alongside income tax and National Insurance.
- Once collected, the levy funds are transferred to an employer’s digital Apprenticeship Service account. The government adds a 10% top-up to these funds, meaning that for every £1 an employer pays into their account, they get £1.10 to spend on apprenticeship training.
- Employers can then use these funds to pay for apprenticeship training and assessment with approved providers. The funds cannot be used for other costs associated with apprentices such as salaries or travel expenses.
One crucial aspect of the levy system is that funds expire after 24 months if not used. This “use it or lose it” approach encourages employers to actively engage with apprenticeship programmes rather than allowing contributions to accumulate indefinitely.
For employers who exhaust their levy funds, the government offers additional support through co-investment.
Apprenticeship levy rules and regulations
Understanding the rules governing the apprenticeship levy is essential for compliance and maximising the benefits. Here’s what to consider:
Geographical limitations: Levy funds can only be used to support apprentices who work in England more than 50% of their time. Scotland, Wales and Northern Ireland have their own arrangements for apprenticeship funding.
Eligible expenditure: Levy funds can only be used for apprenticeship training and assessment with approved providers and assessment organisations. They cannot be used for apprentice wages, travel costs, management costs, work placements, or the costs of setting up an apprenticeship programme.
Transfers: Employers can transfer up to 50% of their annual levy funds to other employers, including those in their supply chain or sector. This allows larger organisations to support smaller businesses in developing talent through apprenticeships.
Expiry of funds: Levy funds expire 24 months after they enter an employer’s digital account if not used. The system operates on a first-in, first-out basis, meaning the oldest funds are automatically used first to minimise the risk of expiry.
Recent and upcoming changes
It’s important to be aware of the fact that the apprenticeship levy landscape continues to evolve. There are several changes are on the horizon:
- The creation of new ‘foundation apprenticeships’ which have been designed to provide entry-level opportunities, particularly for young people not in education, employment, or training
- Changes to the funding of level 7 apprenticeships, with funding only being available for those aged under 22 from 1 January 2026.
*It’s worth noting that these changes will not affect apprentices currently on programmes or their employers.
How to maximise your apprenticeship levy investment
For levy-paying employers, strategic planning is essential to derive maximum value from their contributions. Here are some ways that you can maximise your investment:
Align with business objectives: Successful apprenticeship programmes are those that align closely with an organisation’s strategic objectives and core values. By identifying skills gaps and future talent needs, employers can design apprenticeship programmes that deliver genuine business benefits.
Engage stakeholders: Support from senior management and people managers is crucial for the success of apprenticeship programmes. Ensuring key stakeholders understand the benefits of apprenticeships can help secure buy-in across the organisation. For HR/L&D teams, it’s also critical to make sure that apprentice supervisors, who will line manage apprentices on a day-to-day basis, are informed and engaged. You can read our apprentice supervisor report for employer recommendations.
Consider both new talent and existing staff: The levy can be used to fund apprenticeships for both new recruits and existing employees. Many organisations use the levy to upskill their current workforce, addressing skills gaps and creating progression pathways. This means that even experienced colleagues can benefit from the levy with programmes such as management and solicitor apprenticeships.
Partner with quality partners: Working with experienced training providers like our team here at Damar Training, who understand your sector, can significantly enhance the quality and impact of apprenticeship programmes. Look for providers who offer flexible delivery models and can tailor their approach to your specific needs.
Manage your digital account: Regular monitoring of your Apprenticeship Service account is essential to track funds, manage expiry dates, and ensure compliance with levy rules.
Let Damar help you understand the apprenticeship levy
Hopefully this blog has answered your question: ‘What is the apprenticeship levy?’ It provides a significant opportunity for employers in England with a ring-fenced budget for workforce development and talent acquisition.
At Damar, we’ve been delivering impactful apprenticeships since 1980. If you’ve got questions about your organisation’s levy or you’re not sure that your using it as effectively as you could, please get in touch. We’re here to help.