The Apprenticeship Levy was first introduced by the government in April 2017 all across the UK to fund new apprenticeships to further boost investment in vocational skills. It was first announced in the July 2015 budget by Chancellor of the Exchequer George Osborne.
If you are working through an umbrella company, you’ll find deductions for Apprenticeship Levy along with the Income Tax and National Insurance contributions on your payslip. This article explains in detail what the Apprenticeship Levy is and how it works.
What is an Apprenticeship Levy?
The Apprenticeship Levy is a small tax charge payable by all the employers with an annual pay bill of more than £3 million. It is applied at a rate of 0.5% of the company's annual pay bill minus a fixed annual allowance of £15000.
If separate companies form a group or 'company unit' then their total payroll amount will be used for the calculation. This is done to prevent companies from avoiding the levy by splitting into multiple smaller subsidiaries, with pay bills below £3m thresholds.
All employers including multiple payrolls are eligible to receive an annual allowance of £15000 to regain some of the cost of their Apprenticeship payments.
Who needs to pay the Apprenticeship Levy?
The Apprenticeship Levy applies to all the public and private sector businesses across the UK who pay their employees via PAYE such as Umbrella companies. According to the UK government, as an employer, you have to pay the Apprenticeship Levy if you:
How is Apprenticeship Levy paid?
The Apprenticeship Levy along with the Income Tax and National Insurance Contributions is paid monthly to HMRC through the PAYE process in a similar way to other employment costs. If a company overpays the levy during the year, they’ll get a refund in the form of PAYE credit.
Why are Umbrella company employees supposed to pay Apprenticeship Levy?
All umbrella companies pay the statutory costs of employment from the funds received from the end client or the agency. This includes Employers' National Insurance, pension as well as Apprenticeship Levy.
If you work as an umbrella company contractor, your Levy deductions will appear under the 'statutory costs of employment' section on your payslip.
When you start a new contract you should get an assignment rate and a separate pay rate.
Your assignment rate is the amount paid by the end client for your services which also includes all the necessary employment costs as well as the Apprenticeship Levy.
Your separate pay rate is the amount of money you would receive before personal taxes such as Income Tax, Employees' NIC and pension is deducted.
Why are umbrella companies supposed to pay the Apprenticeship Levy?
Before the levy was introduced and the term following its implementation, there was an argument in the contracting industry regarding an exemption to the Levy for certain employment related businesses. Even though umbrella companies are processing large amounts of contract money resulting in high turnover figures, their profits are not particularly large. So many in the contracting industry believe that the payroll figures don’t relatively signify the scale of business.
Furthermore, it is unlikely that employment-related businesses aimed at more vocational occupations will benefit much from the Levy itself.
Unfortunately, this argument remains ineffective, so the Apprenticeship Levy persists as a component of employment costs on your payslip.
Do limited company directors have to pay Apprenticeship Levy?
Apprenticeship Levy only applies to businesses that pay their employees via PAYE and whose annual income is more than £3 million.
So Limited company directors and sole traders who pay themselves company dividends are not liable to pay Apprenticeship Levy.
Does the Apprenticeship Levy apply to a recruitment agency?
As a recruitment agency or an employment agency, you are liable to pay Apprenticeship Levy if you:
What caused Apprenticeship Levy controversy?
The Apprenticeship Levy remains a source of confusion in the contracting industry regarding the way it gets applied by umbrella companies and agencies on behalf of their contractors.
In the past, some organisations claimed that the umbrella companies have been profiting from the deduction of the Levy from employees’.
Unions also questioned the legitimacy of the Levy deductions made by umbrella companies and agencies. They claimed that the agencies and umbrella companies are immorally passing on the cost of Levy to the contractors.
However, it is not illegal provided the deductions are explained and are agreed upon by the employer at the time of signing up.
Therefore the contractors need to do thorough research on the company they are going to sign up for.
Disclaimer
This article is for information purposes only. We strongly recommend taking professional advice or an expert opinion before reaching any conclusion. We have a team of umbrella companies who can help you with your queries, please feel free to review them. You can also write us an email at [email protected].