Schools and the Apprenticeship Levy

From 6 April 2017, many schools will be required to pay the new Apprenticeship Levy. We recommend 4 practical steps to take now.

The Apprenticeship Levy will only have to be paid by employers whose pay bill is over £3 million per year and will be payable at a rate of 0.5% of the total annual pay bill.  Many maintained schools (as part of the local authority) and most multi-academy trusts are likely to be affected by the levy.

Total annual pay bill
The annual pay bill includes all payments to employees which are subject to employer Class 1 secondary National Insurance Contributions (NICs). This includes earnings even where the applicable NICs rate is 0% (for example where an employee is under 21 or is an apprentice under the age of 25).

When working out whether the total annual pay bill is over £3 million, employers must also take into account any connected companies or charities (that is, briefly, where one company or charity has control over the other). 

Whilst most maintained schools will, by themselves, fall below this pay bill limit, where staff are employed by the local authority then it is the local authority's pay bill which is relevant rather than that of the school. Indications are that the local authority will allocate a proportion of the levy as a proportion of individual school budgets. 

Similarly in a multi-academy trust, as the trust is the employer, individual academies will be affected.

The £15,000 allowance
There is in effect a £15,000 annual Apprenticeship Levy allowance which means that only those employers with an annual pay bill of over £3 million will have to pay and report the levy. This is because 0.5% of an employer’s £3 million pay bill is £15,000, which is fully removed by the £15,000 Apprenticeship Levy allowance.

Only one £15,000 allowance is available to employers which are part a group of connected companies or charities.  If an employer (or group of connected companies or charities) has more than one PAYE scheme, they can share the allowance across these PAYE schemes, by notifying HMRC of the split with their first return of Apprenticeship Levy, which will usually be at the beginning of the tax year.

Paying the levy and accessing funds
Affected employers will need to inform HMRC each month as to whether a levy payment is required.  The first payment will be due in May 2017. Payments will be made into an HMRC apprenticeship online digital account and the Government will top up funds in the account by a further 10%.  Those funds will then be available for the employer to use to support apprenticeships.

This funding cannot be used to pay the salaries of apprentices.  It can only be used to pay the costs associated with the training and assessment of apprentices.  Apprenticeship training can, however, include professional development up to masters level and can be taken up by existing staff. Schools should be aware that there will be a 24 month period for using allocated apprenticeship funding.  After that period, schools will lose any unused funding.

If an employer does not have sufficient funds in its digital account to meet the costs of apprenticeship training and assessment, the employer must co-invest 10% of the outstanding balance for that month while the Government will pay the remaining 90% of the costs (up to a funding band maximum for the relevant apprenticeship). This "co-investment" in the cost of apprenticeship training will be available for employers whether or not they are liable to pay the apprenticeship levy, although any funds in an employer's digital account must be applied before the Government co-invests.

The impact on schools
The system will have the greatest impact on large organisations, as their total annual pay bill is likely to be well in excess of £3 million and therefore the allowance will not go far in mitigating the cost of the levy.  This will of course include multi-academy trusts.

The Local Government Association (LGA) has issued guidance setting out how the Apprenticeship Levy will affect different types of maintained schools.  The LGA confirms that:

• community and voluntary controlled schools "will have to make provision for the relevant cost of the levy in their individual budgets, in the same way as other payroll costs e.g. National Insurance";
• voluntary aided and foundation schools, in which the governing body is the employer, should be assessed on the basis of their own pay bill alone; and
• schools which do not have their own HMRC payroll reference number (for example voluntary aided and foundation schools) will not need to set up a new HMRC reference number unless they have a pay bill of over £3 million.

As the employer, the local authority will have access to its apprenticeship levy funds. Despite this, Apprenticeship and Skills Minister Robert Halfon commented in January this year that it is expected that schools where the employer is the local authority will have "full access to funding for apprenticeship training".

However, whilst small school budgets may need to bear their allocation of the Apprenticeship Levy there is no clear indication of how the local authority (or academy trust) will allocate the funding available to support apprenticeships.

Apprenticeship target for public sector employers
We reported earlier this month on the new rules expected to be in force from April this year under which free schools, academies and academy trusts with 250 or more employees (based on headcount) must "have regard to" the target of 2.3% apprenticeship starts as a percentage of their total workforce. This would mean that a school employing  a total of 260 staff should be aiming for six new apprenticeships. These may be new recruits or existing staff who start an apprenticeship programme. Further detail is available in our previous article here.

Next steps

1. All schools and academies should now carry out a calculation to assess their total annual pay bill on the basis of the total amount of earnings on which they may be liable for Class 1 secondary NICs. 
2. Employers making a report to HMRC will need their Government Gateway login details to hand, as well as any relevant Companies House registered company numbers and/or Charity Commission registered charity numbers.
3. Where the total annual pay bill for tax year 2016/17 was above £3 million, or where the total annual pay bill for tax year 2017/18 is likely to be above £3 million, employers should report to HMRC and pay the levy. There is a useful guide to paying the Apprenticeship Levy at https://www.gov.uk/guidance/pay-apprenticeship-levy. 
4. Schools and academies should ensure that they have plans in place to make full use of the funds which will be available through the Apprenticeship Levy. Guidance on the way apprenticeship funding will work can be found at https://www.gov.uk/government/publications/apprenticeship-levy-how-it-will-work.