When Budget 2015 announced that the government’s reform of apprenticeship funding would involve a new system of vouchers, many in payroll breathed a sigh of relief, says Terri Bethel of the CIPP.
During the consultation process, it seemed a distinct possibility that the PAYE system would be used to handle apprenticeship funding and concerns were raised at the prospect. However, only a few months later, at Summer Budget 2015, the government revealed that the vouchers will be paid for by a new apprenticeship levy to be collected through PAYE from April 2017. Payroll didn’t escape involvement after all.
So, what is the levy exactly, who does it apply to and how do you calculate it?
What we know about the levy (so far)
What we know so far comes from Budget announcements, HMRC’s policy paper and draft legislation (published in February), and some brief guidance on GOV.UK. Further guidance and final legislation is expected shortly.
The levy will be a 0.5% charge on an employer’s pay bill, which can offset against a new levy allowance. The maximum allowance is £15,000 so an employer with a pay bill of under £3m pays nothing (in theory). The levy is paid to HMRC and goes into the employer’s online apprenticeship account, where it can be spent on apprenticeship learning through digital vouchers.
Budget 2016 confirmed that, in England, the government will add 10% to the funds that employers put into their accounts and that a new employer-led Digital Apprenticeship Service will control apprenticeship funding. However, because skills funding is a devolved policy area, the administrations in Scotland, Wales and Northern Ireland will make their own arrangements (potentially adding complexity for employers with activities in more than one region).
Who the levy applies to
The levy applies to anyone who is responsible for paying secondary Class 1 National Insurance contributions and has a pay bill where 0.5% of the pay bill exceeds the levy allowance for that tax year. Setting the annual levy allowance at £15,000 means employers with a pay bill of under £3m in a tax year do not pay the levy. Government publications repeatedly state that less than 2% of employers would have to pay it.
The levy will apply to all public and private sector employers, in all industries and all parts of the UK. Some industries have pre-existing training levies and how the systems will fit together is still being worked out.
The draft legislation says provisions may be made to recover amounts due from someone other than the person liable to pay secondary NICs, such as a managed service company (echoing tax/NICs treatment), as well as provisions for reporting, repayment and appeals procedures.
Calculating the levy
The Department for Business Innovation and Skills (BIS) has published guidance on GOV.UK that includes some reassuringly simple levy calculations. For example:
Employer of 250 employees, each with a gross salary of £20,000 would pay:
- Pay bill: 250 x £20,000 = £5,000,000
- Levy sum: 0.5% x £5,000,000 = £25,000
- Allowance: £25,000 - £15,000 = £10,000 annual levy payment
In reality, although liability for the charge depends on the annual pay bill, it will be calculated and collected for each tax month, which has implications for some employers. We also need to understand what is meant by ‘pay bill’, who is entitled to the allowance and how that is allocated.
The pay bill
The pay bill is defined as the total earnings that secondary NICs would be calculated on, ignoring the effect of the secondary threshold. This ensures that (a) the duty to pay the levy is tied to the employer (not the employee) and (b) earnings below the secondary threshold are included, despite the 0% contribution rate that applies.
This is welcome: NIC-able earnings is well defined in existing legislation, is understood by employers and is already calculated by payroll systems and reported in Full Payment Submissions, all of which reduces the administrative burden.
The calculation period
Because the levy will be collected through the PAYE system alongside income tax and NICs, it is logical that it will be calculated, paid and reported to HMRC on a tax month basis rather than on an annual basis.
This has important implications for employers whose annual pay bill is just below the £3m level and who have fluctuating pay bills. Higher pay bills at the start of the tax year could trigger the levy charge despite there being no liability over the whole tax year after applying the levy allowance.
For example, an employer’s pay bill is £2.4m, so the apprenticeship levy would not be due and would not be triggered if the pay bill arises at an even £0.2m in each tax month. But seasonal workloads mean the pay bill is higher at first, say £0.3m on average in the first four months, dropping to £0.15m on average for the remaining eight months. £0.3m is enough to trigger the levy (if it were continued for 12 months, the annual pay bill would be £3.6m), so the employer incurs a charge that is not due.
This situation is provided for in the draft legislation by allowing regulations to be made to handle overpayments of the levy (by repayment, for example). Assuming such regulations are indeed made, employers affected in this way could claim a repayment, although cash flows may be affected.
The levy allowance
The levy allowance is restricted to one amount for each employer or group of linked employers using the same ‘connected companies’ rules as the Employment Allowance. The linked companies or charities choose which organisation claims the allowance; the levy applies to the entire pay bills of the rest.
However, whereas an employer can offset its full Employment Allowance against the first NICs liabilities in the tax year, the levy allowance is likely to be spread out over the course of the tax year so that levy income is collected evenly through the year and funding can be distributed evenly. In that respect, it is more comparable to recovering statutory payments, which are limited to a proportion of the cost incurred in each tax month.
For example, the annual levy is £27,000 for a £5.4m pay bill, equivalent to £2,250/tax month. If the allowance could be offset in full, no charge would be paid until tax month 7 (and no money goes into the employer’s online account to pay for apprenticeships). Whereas, if only 1/12th of the allowance is offset – £1,250 – the employer would pay £1,000 levy each month.
Paying the levy
The levy will be paid to HMRC alongside an employer’s income tax and NICs liabilities in each tax month, which seems straightforward. The existing PAYE and NICs rules about late payments and late reporting will probably apply.
BIS and HMRC clearly envisage employers being able to rely on existing RTI and PAYE facilities in their payroll systems to handle the calculation, processing and reporting of the levy charge and allowance. Employers with pay bills over £3m are likely to be well-informed about the changes, and have sophisticated payroll software systems that will be updated in plenty of time to put the processes into effect seamlessly.
But what of the 98% of employers who are told they will not be affected by the levy. Can they (and their agents) sit back and relax, safe in the knowledge that they will not be affected by the changes? Probably not.
The difficulty is likely to be successfully claiming the levy allowance. Eligibility cannot be assumed because of the connected companies rules. So, as it currently stands, liability for paying the levy starts with the first pay bill on or after 6 April 2017 for all employers and, as far as we know, the only way to avoid the charge is to claim the levy allowance.
Therefore, all employers, large and small, must ensure that they calculate both the levy and the levy allowance, and claim the offset. Implementing this successfully is likely to depend on everyone’s systems being updated in time, which may be a challenge for small and micro-employers.
Perhaps this will be addressed in the additional details that are on their way. Hopefully, we’ll know more well before the RTI specifications are published for software providers in the summer. April 2017 is less than a year away. Maybe the timescale for the apprenticeship levy is beginning to look a little ambitious.
Terri Bethel is lead technical material author at the CIPP.