What is the apprenticeship levy?

We take a look at the new apprenticeship levy to see what changes are being made to the current system, how employers are reacting and what this means for apprenticeships and graduate programmes.

The apprenticeship levy will change the way that employers and the government fund apprenticeship training in the UK. It’s being brought in to promote apprenticeships with the aim of having three million people start apprenticeships between now and 2020.

From April 2017 employers with a pay bill over £3m per year will be required to pay 0.5% of that into the new apprenticeship levy. For example, if an employer has a pay bill of £5m, it will pay £25,000. The government will offset levy payments with a contribution of £15,000 and is also matching employers’ payments with a 10% top up for every £1 paid in.

As part of the Enterprise Act 2016 the levy will be introduced along with several other measures to promote apprenticeships, including:

  • setting a target for public sector employers that 2.3% of their workforce must be apprentices if they employ over 250 people
  • the creation of the Institute for Apprenticeships (IfA) to regulate apprenticeship training providers
  • making it an offence to call a training programme an apprenticeship that doesn’t meet the government’s standards for apprenticeships.

It’s estimated that around 22,000 employers will be subject to the levy, but a recent study of 500 organisations by City and Guilds has revealed that 23% of the employers surveyed were unaware that the current system for apprenticeships was even changing.

How apprenticeships worked before the levy

Prior to the levy, apprentices aged 16–18 had their training paid for by the government, leaving employers to pay their salary. For those aged 19–24 the government partially funded their training, leaving the employer to cover the rest of the costs and their salary.

Apprenticeships were split into four different levels and this is set to continue. These levels are:

  • intermediate apprenticeships: equal to five passes at GCSE
  • advanced apprenticeships: equal to two passes at A level
  • higher apprenticeships: equal to foundation degrees and above
  • degree apprenticeships: equal to a bachelors or masters degree.

According to statistics released by the House of Commons, there were 904,800 people on an apprenticeship in England between 2015 and 2016 and of those, 509,400 were new starters. And of that number:

  • 291,330 were intermediate apprenticeships
  • 190,870 were advanced apprenticeships
  • 27,160 were higher apprenticeships.

The House of Commons also found that of those starting an apprenticeship:

  • 44% were over 25 years old
  • 30% were aged between 19 and 24
  • 26% were under 19.

The majority (71%) of apprenticeship starters were in three sectors: business, administration and law; health, public services and care; and retail and commercial enterprise.

What changes are being made under the apprenticeship levy?

For those employers that do have to pay the levy, their contributions will be paid into an apprenticeship service account (an account used to store levy payments and purchase apprenticeship training). These funds will then only be available to spend on training programmes provided by government-approved providers.

The method in which training fees are paid will also change both for levy and non-levy payers. Training programmes will be divided into 15 different funding bands ranging in value from £1,500 to £27,000. Apprenticeships will be placed into these bands depending on the level of the apprenticeship and training required; the band then dictates the maximum amount an employer can spend on training from its apprenticeship account. For example:

  • A level 2 adult care worker apprenticeship is in funding band 4 so the maximum an employer can pay towards training from its apprenticeship service account is £3,000.
  • A level 6 aerospace engineer apprenticeship is in funding band 15 so the maximum an employer can pay towards training from its apprenticeship service account is £27,000.

Employers must negotiate with training providers for the best price within the funding band and, once a price is agreed, the total payment for the training will be split into monthly instalments.

It is estimated that 2% of employers will have to pay the apprenticeship levy. For those that don’t pay, training will be paid for through co-investment. This means that employers will pay 10% of the training costs and the government the remaining 90%, up to the maximum limit of the funding band the training falls within.

For those who start an apprenticeship before 1 May 2017, the funding system already in place will continue for the duration of the apprenticeship.

Sector concerns over the apprenticeship levy

In some sectors, concern has been voiced as to whether the levy will provide any benefit. One issue raised by local authority schools is that many schools will have to pay the levy even though an individual school’s pay bill might be under the £3m threshold. This is because a local authority school’s pay bill is paid by the local authority, which will have a pay bill over the limit as it will pay a number of other salaries, not just those of the school.

The Charity Finance Group (CFG) has also expressed its concern over the new changes. The CFG has argued that paying into the levy risks money from the voluntary sector being used to fund the training of apprentices in the private and public sector. This, it says, could affect the public’s confidence in charities as it might be unclear what public donations are being spent on.

How employers will react to the apprenticeship levy

In terms of the changes the levy might make to the apprenticeship market, nothing is yet crystal clear. In its survey, City and Guilds asked employers how the changes might influence their hiring strategy. 31% of respondents said that they would increase their number of apprenticeships due to the levy; however, the same survey showed that 29% were already struggling to fill existing apprenticeship roles. The survey also found that 15% would get rid of other recruitment schemes to afford the cost of the levy.

In another survey, professional education provider BPP partnered up with student-focused market researchers trendence UK and Group GTI (the company behind TARGETcareers). Together they asked Guardian UK 300 employers (the top 300 graduate employers as voted by students) how they will respond to the levy. This survey found that 75% will use it to train existing staff and another 74% will use funds to bring in and train new staff, meaning that lots of employers will be doing a combination of the two. 47% of employers said that they will target their apprenticeships at 16–18-year-olds and 55% would target 19–25-year-olds.

The survey also gathered data on what the levy means for the graduate recruitment market. 31% have said that they will reduce their graduate intake; however, most of these employers are only considering a small reduction, while 40% foresee no change at all and the remainder are still uncertain how they will react.

What might the impact of the apprenticeship levy be?

From the reaction of employers to various surveys, it seems that the apprenticeship levy might increase the number of apprenticeships available; however, it is unclear how much this number will increase. The government’s target to have 2.3% of public sector roles filled by apprentices seems to be a more direct method to increase apprenticeship numbers, but a statement from the Department for Education has revealed that some organisations, including the BBC, Post Office and the Houses of Parliament, will be exempt from the target.

Should the number of apprenticeships rise, the increased regulation being brought in to monitor the quality of training that providers deliver should ensure that standards remain consistent if not improve. And, although some employers have stated they are looking to reduce the number of graduate schemes they offer, they aren’t looking to reduce them drastically and 40% of employers aren’t reducing their number at all.

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