The Apprenticeship Levy (“the Levy”) was introduced with effect from 6 April 2017 and effects employers with an annual wage bill of £3 million or more. The £3m threshold is calculated according to the tax year as opposed to the employers’ accounting year and essentially includes most regular payroll costs except benefits in kind.
The Levy is calculated at 0.5% of the annual pay bill, but employers will have a £15,000 allowance to set against the Levy each year. Where there are connected employers, the £15,000 allowance is divided between the employers (in a manner decided by the taxpayer) as opposed to being available to all connected employers at the full rate.
The Levy is calculated on a monthly basis and works like this:-
- Calculate the Levy at 0.5% of your monthly wage bill (wages, bonuses, commissions etc.);
- Deduct from the calculated monthly Levy one twelfth of the £15,000 allowance;
- Pay over the excess of 1 over 2 (unless this is adjusted by your year-to-date calculation as below).
There is then a cumulative calculation to make sure the Levy and allowance has worked correctly for the year to date:-
- Calculate the Levy at 0.5% on your cumulative year-to-date pay bill;
- Deduct from the year-to-date Levy the year-to-date allowance;
- Pay over the excess of 4 over 5.
The effect of 4 to 6 is that any unused allowance is carried forward from one month to the next within a tax year.
Employers within the Levy scheme should report the Levy charged and the allowance claimed on a monthly basis through the Employer Payment Summary (EPS) submission.
For employers with an annual pay bill of £3m paid evenly through the year it is likely that they will be aware of the Levy and operate it monthly without issue, but those employers with large annual bonuses that take them through the £3m threshold might on first glance think that they can ignore the Levy until the bonus month. This isn’t the case if the employer had a pay bill, including bonuses, of £3m or more in the previous tax year as those employers will be automatically within the regime. They’ll instead need to report a zero Levy in the months where the monthly pay bill is £250,000 or less and then operate the cumulative calculations in the months where the pay bill exceeds £250,000.
Employers coming together in business combinations part way through the year and also those restructuring or downsizing and making redundancy payments etc. should also watch out for inadvertently breaching the threshold, particularly when connected enterprises are taken into account.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.