The government is changing the way that it funds apprenticeships in England from spring 2017. Employers with an annual pay bill of over £3 million will be required to contribute to a new apprenticeship levy. The levy requires all companies operating in the UK with a pay bill of over £3 million a year to invest in apprenticeships.

This levy is also applicable to companies with a pay bill of less than £3 million a year if they are connected to other companies and charities for employment allowance purposes which when added together have a pay bill of more than £3 million.

However, all companies will have a levy allowance of £15,000 per year which can be offset against the apprenticeship levy bill.

So, how is the levy calculated? The levy is based on 0.5% (half a percent) of a company’s total pay bill. This 0.5% represents their apprenticeship levy, against which they can offset the £15,000 levy allowance or, if they are a connected company or charity, such proportion of the levy allowance. This must be agreed with HMRC and remain unchanged on an annual basis.

For example, a company with an annual pay bill of £5 million will be charged £10,000 per year. (0.5% x £5,000,000) – £15,000 = £10,000 annual levy payment.

All companies with pay bills over £3 million will have to calculate what they owe from the first month of the tax year using the following method:

  1. Divide your apprenticeship allowance by 12 (£1,250 per month).
  2. Subtract this figure from 0.5% of your monthly pay bill. And for each of the following months:
  3. Calculate the total pay bill for the year to date.
  4. Total your monthly allowance for the year to date.
  5. Subtract 4) from 0.5% of your total pay bill for the year to date.
  6. Subtract the amount of apprenticeship levy that you’ve paid for the year to date.

This will be reported to HMRC through the Employer Payment Summary (EPS) section of Real Time Information (RTI).

However, companies will need to report to HMRC if they have an annual pay bill of over £3 million threshold, or if they are a connected company with a total pay bill greater than the threshold.

Where the levy allowance has been split over a number of connected companies, each of the connected companies will have to report to HMRC their share of the allowance.

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