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 0.5% of each employer’s payroll. The payroll total includes salaries, bonuses and commissions paid to employees who are aged 16 and over.
All employers can use a £15,000 allowance to offset against the Levy for in-house vocational training.
This allowance was introduced to protect smaller employers from paying the Levy. In practice, it means that firms with a total annual wage bill of £3m or less don’t have to pay it, i.e. 0.5% x £3m = £15,000.
However, although the Levy only applies to 2% of UK businesses, many umbrella companies are also included, as they process large – sometimes huge – 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.
Your umbrella company must deduct Employers’ National Insurance Contributions and the Apprenticeship Levy from their employees’ pay by law.
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 your client pays 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 (income tax, employees’ NICs) are deducted.
Why have Apprenticeship Levy deductions caused controversy?
Some organisations claim that umbrella companies profit by deducting the Levy from their employees’ pay.
while 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. The umbrella then deducts this amount and pays HMRC via payroll.
However, in rare cases, unscrupulous providers may fail to ‘uplift’ workers’ pay rates to compensate for the Levy’s costs.
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).
