Apprenticeship Levy: Does Your Business Need to Pay It?

By John Thomas, Senior Accountant

The Apprenticeship Levy has been with us since 2017, but growing businesses still get caught out by it. It applies based on your total pay bill, it is reported through the payroll, and once you cross the threshold there is no opt-out. With wages rising, more employers are drifting into scope each year. Here is how it works, what it costs, and how to get value from it.

Who pays and how much

The levy applies to employers with an annual pay bill of more than 3 million pounds. The pay bill is the total amount of earnings subject to Class 1 secondary National Insurance, which broadly means total employee earnings on which employer NIC is due.

The charge is 0.5% of the pay bill, less a 15,000 pound annual allowance. So an employer with a 4 million pound pay bill pays 0.5% of 4 million (20,000 pounds) minus 15,000, which is 5,000 pounds for the year. An employer with a 10 million pound pay bill pays 50,000 minus 15,000, which is 35,000 pounds.

Connected companies and charities share a single 15,000 pound allowance between them, which is an important detail for groups. The allowance is split across the year through the payroll software, month by month.

How it is reported and paid

The levy is reported through the Employer Payment Summary and paid to HMRC alongside PAYE and National Insurance, monthly. Your payroll software calculates it automatically once the pay bill crosses the threshold, but the calculation depends on correct pay bill figures, so payroll accuracy matters.

Because it is collected monthly based on year-to-date figures, the amount can fluctuate through the year as the pay bill grows. Finance teams should forecast it as part of the employment cost budget rather than discovering it in the payroll journals.

The digital account and levy funds

Levy payments go into the employer's digital apprenticeship account, topped up by the government with an additional 10%. These funds can then be spent on apprenticeship training and assessment with approved providers. Funds expire after 24 months if unused, so paying the levy and then ignoring the account is literally leaving money on the table.

Employers can also transfer up to 25% of their annual levy funds to other employers, which is useful for supply chains: a large contractor can fund apprenticeships at its subcontractors, for example.

If you do not pay the levy

Employers with pay bills under 3 million pounds do not pay the levy but can still access apprenticeship funding. The government funds most of the training cost for non-levy employers, with the employer contributing 5% as co-investment. Smaller employers taking on young apprentices may get additional incentives.

The message for smaller businesses: apprenticeships are heavily subsidised whether or not you pay the levy. The funding system is designed to make hiring apprentices affordable.

Getting value from the levy

Plan apprenticeships deliberately. Map the skills gaps in the business against available apprenticeship standards, from entry-level to degree apprenticeships. The levy funds training; the business provides the roles.

Use the full 24 months. Track fund expiry dates in the digital account and schedule training starts so funds are used before they expire.

Consider transfers. If you cannot use your funds, transferring to suppliers or local businesses in your network builds relationships and keeps the money productive.

Combine with recruitment strategy. Apprenticeships work best as a talent pipeline, not a tax exercise. Businesses that integrate apprentices into workforce planning get the most value.

Watch the threshold

The 3 million pound threshold is fixed in cash terms while pay bills grow with wage inflation and headcount. A business with a 2.7 million pound pay bill today can cross into scope within a couple of pay rounds. Model the pay bill annually, and when you are approaching the threshold, budget the levy cost and set up the digital account in advance rather than reacting to the first payroll deduction.

Employment taxes are increasingly complex, and the levy is one more moving part. Finex Outsourcing runs UK payroll with levy calculations, Employment Allowance claims and auto-enrolment handled as standard. If payroll compliance is eating management time, talk to the Finex Outsourcing team about handing it over.