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Umbrella company payslips – what is the Apprenticeship Levy?

If you are an umbrella company employee, you may notice deductions for the Apprenticeship Levy on your payslips. Here we explain what this deduction means.

What is the Apprenticeship Levy?

The government introduced the Apprenticeship Levy in April 2017 as a measure to fund new apprenticeships and encourage the development of vocational skills.

The Levy affects all businesses with an annual wage bill of £3m or more and is applied at a rate of 0.5% of each employer’s payroll.

All employers can use a £15,000 allowance to offset against the Levy, for in-house vocational training

Although the Levy only applies to 2% of UK businesses, many umbrella companies are also included, as they process large sums of contractor funds.

So, even if umbrella company profits are typically low, their turnover levels are very high.

Why am I paying for the Levy as a contractor?

On your umbrella payslip, you may notice an entry under ’employment costs’, or something similar.

By law, your umbrella company must deduct Employers’ National Insurance Contributions and the Apprenticeship Levy from their employees’ pay.

You may wonder why you – as a worker – are paying ’employers’ costs’ at all.

In fact, before you start a new contract, you should be quoted an assignment rate and a separate pay rate.

The assignment rate is the sum paid by your client to the umbrella for your services. This rate includes all employment costs (such as employers’ NICs and the Levy itself).

Your pay rate is the amount of money you receive before personal taxes are deducted (income tax, employees’ NICs).

Why have Apprenticeship Levy deductions caused controversy?

Some organisations claim that umbrella companies profit from the deduction of the Levy from their employees’ pay.

Perhaps the most headline-grabbing example of this came from the Unite union in 2018.

The union claimed that whilst it was “highly immoral to pass this cost on to the worker, it is not illegal provided the worker has agreed to the deduction.”

As we’ve already explained, the Levy should be included in the contractor’s assignment rate – then deducted by the umbrella and paid to HMRC via payroll.

However, in some rare cases, unscrupulous providers may fail to ‘uplift’ the pay rate of workers to compensate for the costs of the Levy.

This is another reason why we encourage contractors to take time researching umbrella company options before signing up.

Only use an established UK-based umbrella company – ideally one which independently audits all of its payslips.

Do limited company contractors have to pay the Levy?

No, the Levy is only applied if you are paid by PAYE (i.e. umbrella company workers). You are affected if you work via your own limited company, or are self-employed (i.e. a sole trader).

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Last updated: 9th February 2024