Apprenticeship Levy

The Apprenticeship Levy is a tax on larger employers' pay bills. If your business has an annual pay bill over £3 million, you'll need to pay 0.5% of that pay bill to HMRC each month, minus an allowance. Understanding whether you need to pay, how to calculate what you owe, and how to report it correctly is essential to staying compliant with your PAYE obligations.

Who needs to pay the Apprenticeship Levy

You must pay the Apprenticeship Levy if your business has an annual pay bill of more than £3 million. The levy applies across all sectors and business types.

If your business is connected to other companies or charities for Employment Allowance purposes, you need to look at your combined annual pay bill. If the total across all connected entities exceeds £3 million, you'll need to pay the levy. The rules for determining connected companies are the same as those used for Employment Allowance.

What counts as your annual pay bill

Your annual pay bill includes all payments to employees that are subject to employer Class 1 secondary National Insurance contributions. This means:

Include:

• Wages, bonuses and commissions
• Payments to employees earning below the secondary threshold and lower earnings limit
• Payments to employees under the age of 21
• Payments to apprentices under the age of 25

Exclude:

• Earnings of employees under the age of 16
• Earnings of employees not subject to UK National Insurance contributions legislation
• Earnings on which Class 1A National Insurance contributions are payable (such as benefits in kind)

Other industries and training levies

Even if you already contribute to an industry-wide training levy arrangement (such as the Construction Industry Training Board Levy), you still need to pay the Apprenticeship Levy if your pay bill exceeds £3 million.

The Apprenticeship Levy allowance

Every employer receives an annual Apprenticeship Levy allowance of £15,000. This allowance reduces the amount of levy you actually have to pay.

For employers not connected to other companies or charities:

You get the full £15,000 allowance. In practice, this means you only start paying the levy once your annual pay bill exceeds £3 million (since 0.5% of £3 million equals £15,000).

For connected companies or charities:

You only get one £15,000 allowance to share between all connected entities. You can decide how to split this allowance, but you must report your decision the first time you pay the levy, and you cannot change it during the tax year.

Dividing your allowance

You can divide your £15,000 allowance between:

• All your PAYE schemes (if you run multiple schemes)
• Your connected companies or charities

Once you've set how the allowance is divided at the start of the tax year, you must stick with that division even if your company structure changes during the year (for example, through a merger or acquisition). You can only change the division at the start of the next tax year.

If you have multiple PAYE schemes and don't use your full allowance during the year, you can adjust how it's been divided at the end of the tax year to offset unused allowance against another scheme.

Important note: You cannot carry over any unused allowance into the next tax year.

Special rules for public bodies

Public bodies (excluding charities) each receive a full £15,000 Apprenticeship Levy allowance because they're not considered connected companies. However, public bodies that are charities must follow the connected charities rules.

NHS trusts and other health service bodies (including Scottish Health Boards, Welsh Local Health Boards, and Health and Social Care Trusts in Northern Ireland) are treated as companies and must follow the connected companies rules.

How to calculate what you owe

The Apprenticeship Levy is charged at 0.5% of your annual pay bill, minus your allowance.

HMRC's Basic PAYE Tools can help you work out how much to pay.

For the first month of the tax year:

1. Divide your Apprenticeship Levy allowance by 12 (£15,000 ÷ 12 = £1,250)

2. Calculate 0.5% of your monthly pay bill

3. Subtract the monthly allowance (£1,250) from the 0.5% figure

For each following month:

1. Work out your total pay bill for the year to date

2. Add up your monthly levy allowances for the year to date

3. Calculate 0.5% of your total pay bill for the year to date

4. Subtract your total levy allowance for the year to date

5. Subtract the amount of levy you've already paid in the year to date

If you start paying the levy part way through the tax year:

1. Divide your full annual allowance by 12 (£15,000 ÷ 12 = £1,250)

2. Multiply by the number of months since the start of the tax year

3. This gives you your accumulated allowance for the first month you report

Any unused allowance can be carried forward into the next month within the same tax year.

Reporting and paying the levy

You must report how much Apprenticeship Levy you owe each month through your Employer Payment Summary (EPS). You need to start reporting at the beginning of the tax year if:

• Your annual pay bill (including any connected companies or charities) in the previous tax year was more than £3 million
• You expect your annual pay bill for the current tax year will be more than £3 million
• Your annual pay bill unexpectedly increases to more than £3 million during the year (start reporting when this happens)

Important: Once you've started paying the Apprenticeship Levy, you must continue reporting it until the end of the tax year, even if your annual pay bill turns out to be less than £3 million.

If your business has connected companies or charities, each entity will need to tell HMRC separately how much Apprenticeship Levy they owe.

Modified PAYE schemes

If you run a modified PAYE scheme, you need to account for National Insurance contributions as usual. Use your best estimate of all earnings subject to Class 1 secondary National Insurance contributions to check if you need to pay the levy. Submit an EPS each month using these estimated figures.

At the end of the tax year, you must:

• Check your estimated pay bill against the actual figures
• Submit an extra EPS to correct any difference and pay any additional Apprenticeship Levy owed

Sources

• Pay Apprenticeship Levy

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.