What the levy is and who pays it
The apprenticeship levy was introduced in April 2017. It charges 0.5% of annual pay bill on UK employers whose annual pay bill exceeds £3 million. Each employer receives a £15,000 annual allowance, which has the practical effect of making the levy payable only on the portion of pay bill above £3 million — so an employer with a pay bill of exactly £3 million pays nothing, and an employer with a pay bill of £3.5 million pays 0.5% of £500,000 = £2,500 per year.
The vast majority of UK employers do not pay the levy because their pay bill is below £3 million. Most small and medium businesses — those with fewer than around 100 employees at average UK salaries — fall well below this threshold. The levy is primarily paid by large employers: retail chains, NHS trusts, large manufacturers, financial services firms, and central government. It is deducted monthly through PAYE and flows into a digital apprenticeship service account from which the employer can draw funds for apprenticeship training.
Pay bill for levy purposes means the total of all payments to employees that are subject to Class 1 secondary (employer) NI — broadly, gross wages and salaries, overtime, shift pay, bonuses and commissions, but not pension contributions, expenses or benefits taxed separately. Pay bill is not the same as payroll cost: it excludes employer NI, pension, and non-cash benefits.
How to calculate your liability
The formula is straightforward: (annual pay bill × 0.5%) minus £15,000 = annual levy liability. The £15,000 allowance translates to a pay bill threshold of £3 million (£15,000 ÷ 0.5% = £3,000,000). For monthly reporting, divide the annual allowance by 12 (£1,250 per month) and apply it against monthly levy calculated at 0.00417% of monthly pay bill.
At a pay bill of £3.5 million: levy = (£3,500,000 × 0.5%) − £15,000 = £17,500 − £15,000 = £2,500 per year. At £5 million: levy = (£5,000,000 × 0.5%) − £15,000 = £25,000 − £15,000 = £10,000 per year. At £10 million: levy = £50,000 − £15,000 = £35,000 per year.
Connected employers share the £15,000 allowance — they cannot each claim the full £15,000. Where a business operates through multiple legal entities under common control, the levy allowance is split between connected entities. This is a common trap for group structures where each subsidiary operates a separate payroll: the group may pay levy even if no individual entity reaches £3 million, if the group as a whole does.
What you can spend levy funds on
Funds in a levy-paying employer's digital apprenticeship service account can be spent on training and assessment costs for apprentices working in England. The training must be delivered by an approved training provider on an approved apprenticeship standard. Levy funds cannot be used for apprentice wages, travel costs, equipment, or any costs outside the approved training contract.
Each apprenticeship standard has a maximum funding cap — the most the government will pay towards training for that standard. Where training costs exceed the cap, the employer must fund the excess themselves. The apprenticeship service account does not carry forward indefinitely: unused funds expire 24 months after entering the account, so levy-paying employers should have an active apprenticeship strategy to avoid losing funds.
The digital apprenticeship service account also shows real-time levy balance, reserved funds, and training payment schedules. Large employers with complex apprenticeship programmes use the service to manage multiple providers, cohort intakes and spending against their training plan. ESFA (Education and Skills Funding Agency) audits are conducted to confirm that levy spending meets the rules.
Non-levy employers: co-investment and reservations
Employers below the £3 million pay bill threshold do not pay the levy and do not have a digital apprenticeship service account funded by their own contributions. Instead, they access apprenticeship funding through a co-investment arrangement: the government contributes 95% of apprenticeship training costs, and the employer pays the remaining 5% directly to the training provider.
To access this funding, non-levy employers must create an account on the apprenticeship service and reserve funding against a specific apprenticeship standard and start date. Reservations must be made before the apprenticeship starts — employers cannot apply for funding retrospectively. The number of reservations available to non-levy employers in each academic year is limited, so planning ahead is important particularly for employers intending to start multiple apprentices.
Non-levy employers can also benefit from additional incentive payments in some circumstances — for example, for hiring apprentices aged 16–18 or those with an education, health and care plan. These payments are made direct to the employer and are in addition to the 95% training cost contribution. A non-levy employer hiring a 17-year-old on an apprenticeship standard can access training cost contributions plus any applicable incentive payments at very low net cost, making apprenticeships financially attractive even without a levy account.
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