How the Apprenticeship Levy Works

How Does the Apprenticeship Levy Work?

The Apprenticeship Levy is a government initiative designed to increase investment in apprenticeships across the UK. Introduced in April 2017, the levy aims to give employers more control over training and upskilling their workforce. While the term may sound like just another business tax, the levy can offer real value if understood and used correctly.

In this article, we explain how the Apprenticeship Levy works, who pays it, how it’s calculated, and how employers can access and use their levy funds to support apprenticeship training.

What Is the Apprenticeship Levy?

The Apprenticeship Levy is a UK government policy that requires larger employers to contribute to the cost of apprenticeship training. The funds collected are placed in a digital account, which the employer can then use to pay for apprenticeship training and assessment through approved providers.

The levy is part of the government's wider strategy to close skills gaps, boost productivity, and encourage more businesses to offer apprenticeships.

Who Pays the Apprenticeship Levy?

The levy applies to all UK employers with an annual payroll bill over £3 million. This includes both public and private sector employers, regardless of industry.

If your total payroll is £3 million or less, you do not pay the levy, but you can still benefit from government-funded apprenticeship schemes through co-investment, which we will cover later.

For businesses that exceed the threshold, payment is mandatory.

How Is the Levy Calculated?

The levy is charged at a rate of 0.5 per cent of your annual payroll. However, every employer receives a £15,000 annual allowance, which effectively means:

• If your payroll is exactly £3 million, your levy bill will be £15,000

• If your payroll is under £3 million, the £15,000 allowance cancels out the levy entirely

The payroll figure used includes wages, bonuses, commissions, and pension contributions.

The levy is calculated and paid monthly via PAYE, alongside income tax and National Insurance.

How Does the Digital Apprenticeship Service Work?

Once you start paying the Apprenticeship Levy, your contributions are placed into a digital account through the Apprenticeship Service portal managed by the government.

From this account, you can:

• Browse and select approved apprenticeship training providers

• Choose relevant apprenticeship standards or frameworks

• Allocate funds to training and end-point assessments

• Manage apprentice records

• View your account balance and payment history

You must spend your digital funds within 24 months, or they will expire and return to the government. To get the most value, businesses are encouraged to plan their apprenticeship strategy in advance.

Government Top-Ups and Transfers

The government adds a 10 per cent top-up to your monthly levy contributions. For example, if you pay £1,000 into your account, it becomes £1,100 with the top-up.

Additionally, levy-paying employers can transfer up to 25 per cent of their annual funds to other businesses, such as supply chain partners or smaller companies. This supports wider skills development across the industry.

To make a transfer, both the sender and recipient must be registered with the Apprenticeship Service.

What About Employers Who Do Not Pay the Levy?

If your business does not meet the £3 million payroll threshold, you do not have to pay the levy, but you can still benefit from apprenticeships through the co-investment system.

Under this system:

• The government pays 95 per cent of the apprenticeship training cost

• You, as the employer, pay just 5 per cent

• If you employ fewer than 50 people and take on apprentices aged 16 to 18, the government may cover 100 per cent

You will still use the Apprenticeship Service to access training providers, register apprentices, and manage payments.

What Can You Spend Apprenticeship Levy Funds On?

You can use the funds in your digital account to pay for:

• Apprenticeship training provided by an approved training provider

• End-point assessments required to complete the apprenticeship

• Apprenticeships at any level, from entry-level to degree apprenticeships

• New apprentices or existing employees if the training is relevant to their role

You cannot use levy funds to cover apprentice wages, travel costs, recruitment expenses, or management training that is not part of an approved apprenticeship programme.

Reporting and Compliance

Employers must report levy payments through their monthly PAYE submissions using the Employer Payment Summary (EPS). You need to include:

• The amount of levy you owe that month

• Any portion of the £15,000 allowance being used

• The cumulative year-to-date total

HMRC monitors compliance and may impose penalties for underpayment or misuse of funds.

Advantages of Using the Levy Effectively

When used properly, the Apprenticeship Levy can be a valuable tool for:

• Addressing skills shortages within your organisation

• Reducing recruitment costs by training new talent internally

• Supporting career progression for existing staff

• Improving staff retention and morale through structured learning

• Getting a return on your mandatory levy contributions

Many employers who initially saw the levy as a cost have come to view it as a strategic opportunity to strengthen their workforce.

Final Thoughts

The Apprenticeship Levy is not just another business tax. For larger employers, it is a funding mechanism to develop in-house talent and invest in future skills. For smaller businesses, it provides heavily subsidised training with minimal upfront cost.

Understanding how the levy works and using the Apprenticeship Service platform effectively can help you unlock government funding and build a stronger, more capable team. Whether you are a levy payer or not, there are clear benefits to engaging with the apprenticeship system and planning ahead for workforce development.