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Umbrella company payslips – what is the Apprenticeship Levy?

If you are working via a PAYE umbrella company, you may have noticed a deduction for the Apprenticeship Levy on your payslip. Here we explain what this deduction means.

What is the Apprenticeship Levy?

First introduced in April 2017, the Apprenticeship Levy was introduced by the government to fund new apprenticeships. The first goal of this new scheme is to introduce 3m new apprenticeships by 2020 in an attempt to encourage the development of vocational skills.

The Levy affects all businesses which have a turnover of £3m or more and is applied at a rate of 0.5% of each employer’s payroll.

Although the Levy is only expected to apply to 2% of UK businesses, umbrella companies are typically included as they are processing large amounts of contract funds – so their turnover figures are high, even if their profit levels are not particularly large.

All employers are eligible to receive £15,000 allowance to offset against the Levy costs they have to pay, to use for their own vocational training, although this is not likely to be of particular use to umbrella companies.

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’. In fact, when you start a new contract, you should be presented with an assignment rate and a separate pay rate.

The assignment rate is the sum paid by your client for your services, plus all employment costs (such as employers’ NICs and the Levy itself). Your pay rate is the amount of money you will receive before personal taxes have been deducted (income tax, employees’ NICs).

Why have Apprenticeship Levy deductions caused controversy?

Some organisations have claimed that umbrella companies have been profiting 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.”

In some 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 established contractor-specialist PAYE umbrella companies.

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 will not be affected if you work via your own limited company, or are self-employed (i.e. a sole trader).

About the Editor

  • James Leckie

    James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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Last updated: 1st June 2022