Apprenticeship Levy – the facts
Introduction
The Apprenticeship Levy is a tax on employers collected by HM Revenue and Customs (HMRC) based on the employers total pay bill (using secondary National Insurance earnings).
Training funding for apprentices is not part of payroll or the operation of PAYE. Funding is handled by various other government departments and devolved administrations.
Apprenticeship Levy – What is it
Since 6 April 2017, Employers are required to pay the Apprenticeship Levy on pay bill amounts which exceed £3 million. This is achieved by applying an annual Apprenticeship Levy offset allowance of £15,000. This means the Apprenticeship Levy amount is reduced by £15,000 across the year on a monthly cumulative basis. The employer cannot claim any unused allowance or carry it into the next tax year.
If a business starts or stops part way through the tax year (6th April through to 5th April), the full annual Apprenticeship Levy allowance is operated against the amount of the levy that they owe – it is not pro-rated.
Group Employer with multiple Payroll and Tax Groups – How to allocate the allowance
The Apprenticeship Levy allowance of £15,000 can be allocated between:
- Payroll and all PAYE schemes
- Any connected companies or charities
The group employer must decide how to split the allowance between each and report to HMRC how they have allocated the allowance.
Employers are not permitted to change the share of the allowance until the start of a new tax year.
What if the business structure changes?
The employer continues to apply the levy allowance that was allocated at the beginning of the tax year (on 6th April), even if part way through the year:
- they become a connected employer (such as by merging with or acquiring another company)
- the structure of the group of connected companies or connected charities changes
An employer can decide how to allocate the levy allowance across the connected companies or charities at the start of the next tax year. The combined total must not exceed £15,000.
Public Body Employers
Public bodies each get a full Apprenticeship Levy allowance as they are not considered to be connected companies.
NHS trusts and other health service bodies (such as Scottish Health Boards, Welsh Local Health Boards or Irish Health and Social Care Trusts) are considered to be companies and therefore have to follow the connected companies rule.
Public bodies which are charities must follow the rules for connected charities.
How is the levy calculated?
The levy calculation forms part of the SD Worx reporting within Tax Reference Reconciliation Summary and is automatically applied using the stated offset allowance and exemptions type (cumulative or annual).
This calculates each employer split amount owed (at payroll and tax group PAYE reference level). The Apprenticeship Levy is charged at 0.5% of the annual pay bill. You can also use HMRC’s Basic PAYE Tools to help you work out how much you need to pay.
An example SD Worx automated calculation where the cumulative method is applied is as follows:
- Divide the Apprenticeship Levy allowance allocated by 12
- Subtract this figure from 0.5% of the monthly pay bill.
For each of the following months:
- Calculate the total pay bill for the year to date (this is held against data item N908 at individual level).
- Add up the monthly levy allowances for the year to date.
- Subtract the levy allowance for the year to date from 0.5% of the total pay bill for the year to date.
- Subtract the amount of the levy previously paid.
If you begin paying the levy part way through the tax year, there is a need to calculate how much of the annual allowance has been accumulated in the current year. Divide the full annual allowance by 12 and multiply by the number of months since the start of the tax year. This figure is the cumulative allowance for each month you report the levy.
Any unused allowance can be carried forward into the next month within the same tax year, but not into a subsequent tax year.
Other considerations
An employer still needs to pay Apprenticeship Levy even if they already contribute to an industry-wide training levy arrangement, for example the Construction Industry Training Board Levy.
Reporting how much you owe (paybill is over £3 million annually)
Since 6 April 2017, employers must inform HMRC via Real Time Information (RTI) on the Employment Payment Summary (EPS), how much Apprenticeship Levy is owed for each PAYE scheme each tax month if either of the following apply:
- the annual pay bill (including any connected companies or charities) in the previous tax year was more than £3 million
- they think the annual pay bill (including any connected companies or charities) for the tax year will be more than £3 million
Once paying Apprenticeship Levy starts, then reporting on the EPS continues until the end of the tax year even if your annual pay bill turns out to be less than £3 million by tax year end.
Paybill was under £3 million annually last year
Where the annual paybill is under £3 million in the prior tax year, then the employer may exempt themselves from the cumulative operation of the Apprenticeship Levy until the annual pay bill (including any connected companies or charities) unexpectedly increases to more than £3 million. When this happens then reporting must commence and the calculation is undertaken using the full annual £15,000 allowance on an annual basis until the end of the tax year. In the following new tax year, the exemption must be removed and the cumulative method applied.
How is the Apprenticeship Levy reported and to whom?
Connected companies or charities each need to tell HMRC how much Apprenticeship Levy they owe each tax month for the PAYE reference on the Real Time Information (RTI) Employer Payment Summary (EPS) and include the following (these are reported on the Tax Reference Reconciliation Summary):
- the amount of the annual Apprenticeship Levy allowance allocated to the PAYE scheme
- the amount of Apprenticeship Levy owed to date in the current tax year
If there is no levy amount in the tax year then the employer does not need to report Apprenticeship Levy on the EPS.
Record keeping
As with all PAYE records, the employer must retain records for at least 3 years after the tax year to which they relate. Under the statute of limitations, there is wisdom in retaining records for 6 years after the tax year to which they relate (but this is not an HMRC legal obligation).
Changes to your pay bill
Report any changes to the Apprenticeship Levy as a result of changes to the pay bill on the next EPS. The individual pay bill amounts are maintained by using engine codes N901, N902 and N908.
If errors are found in the total annual pay bill at the end of the tax year, then the employer must submit an extra EPS with the correct Apprenticeship Levy for the full tax year and pay over what is owed.
Employers with modified PAYE schemes
For employers that operate a modified PAYE scheme, there is no change to the operation of National Insurance Contributions. The employer must use a best estimate of all earnings that are subject to Class 1 secondary NICs and apply this to data item N901 to check if you need to pay the Apprenticeship Levy. They will need to submit an EPS each month using these estimated figures.
Tax Year End
At the end of the tax year, the employer should:
- check your estimated pay bill against the actual figures for the tax year
- submit an additional EPS to correct any difference and pay any Apprenticeship Levy owed
The Tax Year End update process will adjust relevant paybill earnings and reflect adjustments of the Apprenticeship Levy on the associated Tax Reference Reconciliation Summary.
How to pay the levy to HMRC
The employer pays the Apprenticeship Levy each month through the PAYE process in the same way as paying Income Tax or National Insurance contributions. The levy is applied to the tax payment on the Tax Reference Reconciliation values.
If you’ve overpaid Apprenticeship Levy during the year, you’ll receive a refund as a PAYE credit and the Apprenticeship Levy payments are a deductible expense for Corporation Tax.
When the levy applies in specific sectors
Franchises
Franchises with an annual pay bill of over £3 million (including any connected companies or charities) will have to pay the levy. They have an annual allowance of £15,000 for all of the franchises under control. They can choose to share the allowance across the franchises under control or across your PAYE schemes.
Off-payroll working
Payments to personal service company, a partnership or other individual which are subject to off-payroll working reforms must be included in the employers pay bill. This is because the employer will be liable to pay the Secondary Class 1 NICs.
Short-lived companies
Short lived companies such as special purpose vehicles will have to pay the levy if they’re liable for Class 1 secondary NICs. They will have a full £15,000 allowance if the special purpose vehicle has been set up part way through the tax year. They will have to check whether you’re connected to another company or charity at the start of the following tax year.
Managed service companies
Managed service company have to pay the levy if they have an annual pay bill of over £3 million. If connected to another employer, they may have to pay the levy if the pay bill is less than £3 million.
Employment or recruitment agencies
Agencies need to pay the levy if all the following apply:
- they supply labour (including subcontractors) to a client
- they pay Class 1 secondary NICs on the earnings of those workers
- the pay bill exceeds £3 million (including any connected companies or charities)
Joint ventures
If a joint venture partnership where 2 companies each have a 50% share in a further company, neither company will have overall control. As a result, the joint venture would not be connected to any other companies. The 2 companies and the joint venture would therefore each be entitled to their own levy allowance of £15,000.
Other types of joint ventures will get a full £15,000 allowance if they’ve been set up part way through the tax year. They’ll need to check if they’re connected to another employer at the start of the next tax year to work out their allowance for the following year.
Schools
For voluntary-aided schools, foundation schools and academies, the governing body is the employer and each is entitled to an allowance of £15,000.
For other maintained schools, the local authority is the employer and the local authority has one annual allowance of £15,000.
Multi-academy trusts will get a single annual allowance of £15,000 to be shared.
If a school becomes an academy part way through a tax year, the academy’s governing body will be responsible for the Apprenticeship Levy from this point and get a full allowance of £15,000.
SD Worx and the Apprenticeship Levy
The SD Worx Pay services and solutions assist client employers with their legal obligations in the following way:
- A payroll process calculation engine field records the secondary NI earnings for each individual that makes up the employer pay bill (as this can be different to the NI earnings values especially where there is no actual NI contribution due – i.e. those who earn under the LEL, under 25 apprentices, under 21s, Freeport and Investment Zone employer reliefs etc). The accumulation is automatic for payroll processed amounts in period. Additional data item engine codes: N901, N902 and N908 – were introduced to facilitate manual adjustments, overrides or service employee transfer values from one payroll to another.
- An ability for the employer to assign the annual offset allowance allocation for the tax year (a value in whole pounds between £0 and £15,000) to the payroll and tax group within the reporting solution – this is required to enable an accurate levy calculation.
- The online Tax Reference Reconciliation Summary report provides the employer with the calculation of the Apprenticeship levy based on the employer pay bill, the offset allowance for the relevant tax month, the application of the levy percentage (currently 0.5%) and the application of whole pound truncation. The levy is not calculated on individuals, but on the employers total secondary NI paybill.
- Where the SD Worx Employer Payment Summary (EPS) submission service is used, the ability to submit the relevant: Levy amount, Offset Allowance and Tax Month, else the employer must report these values themselves on their own EPS submission method.
- Facilities are also available to exclude an employer from the Apprenticeship Levy cumulative periodic basis if they would normally have a pay bill of less than £3m in the full tax year. If the exclusion limit is exceeded, then an automated annualised Apprenticeship Levy calculation is triggered and then continues for the remainder of the tax year.
Apprenticeship Levy – Paybill (or earnings for Secondary NI)
For the calculation of the Apprenticeship Levy, there is a need for the accumulation of earnings at employee level that are subject to secondary NI assessment. This would include amounts under the Lower Earnings Limit which may not normally be recorded for NIC purposes, but equally exclude earnings for foreign workers (those with NI contribution letter X using data item N001 X who have no UK secondary NI liability and employers with secondary NI exemptions (such as diplomatic missions) with data item N006 X.
To facilitate the calculation of the employers Apprenticeship Levy within the Tax Reference Reconciliation Summary, at employee level an earnings accumulation field containing the individual employee Paybill is present and populated as part of the ongoing pay calculations.
When manual or adhoc adjustment are undertaken, it is important for the employer to ensure that the PayBill value year to date is appropriately updated to reflect the mid period correction.
The Employer Paybill individual makeup items are available on two SD Worx online reports and are also available for export.
PayBill amount is present on the Employee Gross Earnings Related NI Contributions for payroll. This value is also available for user defined export and reports:
Paybill is also on the Group level equivalent report:
SD Worx Pay and the calculation and reporting of the Apprenticeship Levy.
The calculation of the Apprenticeship Levy is undertaken as part of the SD Worx Pay Online Reporting facility within the Tax Reference Reconciliation Summary.
In addition to the standard reconciliation information for the Payroll and Tax Group (PAYE reference) information, information is present to report, calculate and aid pay over of the Apprenticeship Levy.
The Secondary NI Pay Bill amount is included and represents the totals for the Payroll/Tax Group (PAYE reference) being reported:
Based on the total paybill, the Levy is calculated (truncated to whole pence, then offset by the proportion of the Annual Allowance allocated to this Payroll/Tax Group (PAYE reference) for the tax month. The levy this time is the difference between the total year to date minus the levy previously paid.
The levy amount is added to the Net Income Tax value. Please note that it is the this-time amount related to this payroll as opposed to the tax month, so it is important to ensure that appropriate weekly, fortnightly or lunar pay frequency payments are accumulated to match an equivalent tax month amount for pay over. i.e. the pay over amount is the difference between the YTD amount this tax month, minus the amount already paid in a prior tax month (no matter the payroll frequency being operated).
Employers are required to report levy values on the Employer Payment Summary (EPS) via RTI (this can be undertaken either using the HMRC Basic PAYE Tools) or via the SD Worx EPS filing service. HMRC do not permit the levy to be reported on the regular Full Payment Submission (FPS) and the amount reported must reflect the full PAYE scheme in line with other EPS filing requirements.
Apprenticeship Levy Reporting – Control Parameters – Annual Review
The calculation and reporting of the apprenticeship levy is dependent on certain control parameters. These need to be reviewed annually each tax year to ensure that the correct settings are applied for each new tax year.
The employer must confirm for each Payroll and Tax Group split:
- Whether the group employer pay bill was under £3m in the previous tax year and they are exempt from Apprenticeship Levy calculation until earnings exceed £3m (expressed as Yes-exempt or No-not exempt). Default is No.
- How much of the employer group £15,000 allowance is to be allocated (expressed as whole pounds from £0 through £15,000). Default is £0.
- Whether the Employment Allowance £5,000 is to be allocated (expressed as Yes-qualifying or No-not qualifying). Default is No.
Questions and Answers about the Apprenticeship Levy
Q-Why is the levy not calculated at individual level each pay period?
A-The levy calculation is set in law and the requirements are those set out by HM Revenue & Customs (HMRC). The calculation is an employer level only calculation with a single whole pence truncation point, and truncated allowance amount and a whole pounds truncated levy amount. A calculation at employee level would not match this obligation. The allowance offset against the levy is not set against employees but shared across a group employer. It is also a monthly calculation regardless of the frequency of the employee level payroll frequency. Some employers may want a means of costing or cross charging an estimated amount of levy. SD Worx Pay offers the ability for non-pay and non-deduction items which equally can be not displayed to the employee which may be suitable. The SD Worx Payroll HR and Legal Services team may be able to assist.
Q-The levy only applies to England, so how do you exclude Scottish resident employees or the Welsh?
A-The levy applies to all employees in the UK. There is no exclusion of any of the devolved nation resident employees. The confusion arises as the funding of apprenticeships is different across the devolved nations. However, Scotland, Wales and Northern Ireland will get a share of the levy amount paid by employer based on the proportion of employees that HMRC believe are resident across the devolved nations. The HMRC view and employer view of residency may differ! Promotion of the HMRC Personal Tax Account and encouragement of employee to keep HMRC informed of their current residency address may assist.
Q-How do we identify Apprentices so that the levy amount can be correctly deducted?
A-Apprentices have no relevance to the Apprenticeship Levy amount. It is important to notify the payroll of Apprentices, especially when they are aged under 25 and notify the start and stop dates of the apprenticeship to ensure that the Under 25 NI for apprentices is applied. It has no relevance to the Apprenticeship Levy paid by employers.
It is also important to record accurate apprenticeship information to ensure that the correct National Minimum Wage rates are being adhered to. SD Worx offer minimum pay capabilities which may aid an employers obligations with the payment of National Minimum Wage.
Q-Will the levy appear on Costing and General Ledgers from the payroll process?
A-The payroll calculation on employee pay does not carry out the calculation of the Apprenticeship Levy as it is an employer level monthly calculation and offset by an allowance and so there is a question of how? Therefore, it cannot form part of costing or General Ledgers as standard. Employers are advised to treat the levy as a centralised cost in a similar way to the handling of the £5,000 employment allowance. It is possible to potentially cost a notional payroll calculation amount (for example 0.5% calculation on NIable pay earnings accumulator). This notional value will not and cannot match the actual levy amount calculation as there are considerable offset, rounding and truncation point differences.
Q-Why are you not reporting the levy amount on the regular Full Payment Submission to HM Revenue & Customs
A-HMRC have not introduced any capability to report the levy amounts or the secondary NI paybill on the regular FPS submission via RTI – This is a design of HMRC and their technology partners. It is HMRC that requires the employer to report the values on the monthly Employer Payment Summary (EPS); after all, it is a tax on the employer and is associated with the monthly pay over to HMRC of Tax and National Insurance.
Q-Will the Paybill amount match the HMRC value of Gross Earnings for NI reported on the Full Payment Submission (FPS)?
A-The simple answer is that if it does then it is a coincidence. The earnings for primary NI reported on the Full Payment Submission (FPS) can be different to the earnings for secondary NI that is used for the Apprenticeship Levy paybill. For example, employees who have no primary NI liability may have NI earnings of zero reported on the FPS submission to HMRC (that would be correct), however, their earnings may be counted as part of secondary NI earnings for the purposes of the paybill (for example those earnings below the Lower Earnings Limit and that would be correct also). Equally where an employee has a primary liability but the employer has no secondary NI liability, then the primary earnings will be present on the FPS but for the Apprenticeship Levy calculation the secondary NI earnings would be zero (and that would also be correct). So although for many they match, there are numerous scenarios where they may be different. The secondary NI earnings (the paybill) used for the Apprenticeship Levy calculation is not a reportable item to HMRC. Another example of where they may be different is for new starter with start period pro-ration. For primary NI the earnings would be split between the two periods (some may fall below the LEL), for the calculation of the paybill it would not.
Q-Can SD Worx provide us with the amount that will be allocated to our English Apprenticeship Funding Account.
A-The simple answer is NO unless all employees are treated as English by HMRC. Allocations are made in accordance with the HMRC view on the residency of employees with a share being paid over to the relevant devolved government. In England any allocation is presently enhanced by 10% and the employer has two years to utilise any funds placed into the online account. Please note that there may be times when the levy amount allocated may be clawed back, for example, where the paybill reduces and is not over a rate of £3 million per annum any longer (on a pro-rata cumulative basis in later months). The payment of bonuses can also distort the monthly levy amount depending on when the bonus payments are made.
Apprenticeship Levy – Payroll related engine code data items
Paybill N90n where n is 1 for positive adjustment, 2 for negative adjustment, 8 for replace.
This facility enables the correction of the individual paybill value which is accumulated for the employer calculation of the Apprenticeship Levy
Use N288 to replace the director’s gross Earnings to-date and N908 to replace the paybill amounts.
Format 1
ppppppppppp
Where ppppppppppp is the director’s new total Earnings for NI to-date, in pence, up to 11 numeric characters.
Example
The director’s total Earnings for NI to-date is changed to £3757.50:
N908 375750
Format 2
ppppppppppp/z
Where ppppppppppp is the new total Earnings for Paybill to-date, in pence, up to 11 numeric characters, and z is the contribution letter.
Example
The total Earnings for Paybill is changed to £9755.20, for letter A:
N908 975520/A
Notes
- The following NI letters are valid: A, B, C, D, E, F, G, H, I, J, K, L, M, N, R, S, T, W, V or Z. There is no secondary NI paybill for NI letter X (N001 X) or where there is diplomatic immunity or the employer has no place of business in the United Kingdom (identified by applying the associated data item N006 X)
- At each payroll process, SD Worx Pay uses the NI’able Earnings and the contribution letter to calculate the director’s NI contribution. It updates the NI contribution to-date amount, held against Director’s NI to-date/N218, the total Earnings for NI to date, held against N288 and the Directors Paybill held against N908
- You should replace the total Earnings for NI amount and the Paybill earnings if you have:
- Replaced or adjusted the director’s total NI contributions to-date.
- Entered a pre-determined NI contribution or refund for the director.
- Entered an additional amount contribution amount for the director.
- If the employee becomes a director at the beginning of the tax year, SD Worx Pay automatically maintains the Earnings for NI total and the Paybill earnings, and you should not normally need to replace it.
- You will need to replace the Earnings for NI if SD Worx Pay was not notified at the time the employee was made a director. You do not need to adjust the Paybill earnings.
- If you do not specify a contribution letter, SD Worx Pay assumes the current contribution letter as outlined under N001.
Apprenticeship Levy information resources
Apprenticeship Levy – the employer tax
Information about the Apprenticeship Levy can be located at the following web resource:
HMRC information on what the Apprenticeship Levy is, how that applies to the operation of PAYE and payroll and how it is calculated and paid:
Apprenticeships and funding
The following information relates to Apprenticeships and funding and does not relate to the operation of PAYE and payroll.
Department for Education information on Apprenticeship Levy and Apprenticeship Funding for England:
Information on Apprenticeships and funding in Scotland:
Information on Apprenticeships and funding in Wales:
Information on Apprenticeships and funding in Northern Ireland:
Last updated 4/12/2023(PSP)