Guidance

Apprenticeship Levy — guidance for software developers

Published 20 December 2016

Key facts

From 6 April 2017 the way that the government funds apprenticeships in England changed. Some employers will be required to pay the Apprenticeship Levy and there were changes to the funding for apprenticeship training for all employers.

The levy is charged at a rate of 0.5% of an employer’s pay bill but there is an annual allowance of £15,000 to offset against this. In practical terms, subject to the connected companies and charities rules, only employers with annual pay bills greater than £3 million pay the levy.

How the employer’s pay bill is calculated

What is included in a pay bill

For the purposes of the levy, an employer’s pay bill is all of those employee earnings that are liable to Class 1 secondary National Insurance contributions (NICs) (this also includes all earnings below the Secondary Threshold (ST)). This includes any remuneration or profit coming from employment, such as:

• wages
• bonuses
• commissions
• some pension contributions that National Insurance contributions are paid on

Payments from pensions are generally not considered earnings for National Insurance contributions. However, employer contributions into an employee’s pension can be subject to National Insurance contributions in some circumstances.

Pay bill also includes the earnings of employees under the age of 21 and apprentices under the age of 25. This is because an employer is still liable to pay Class 1 secondary National Insurance contributions on those earnings, but at a rate of 0%.

What is not included in a pay bill

Pay bill does not include any earnings where an employer is not liable to pay Class 1 secondary National Insurance contributions. So the pay bill figure should not include:

• earnings of employees under the age of 16
• earnings of employees not subject to UK National Insurance contributions legislation
• any payment which is not considered earnings for National Insurance contributions purposes or is officially disregarded (for example, pension payments which are not subject to National Insurance contributions)
• benefits in kind that are liable to Class 1A National Insurance contributions
• payments to employees working abroad that are making employee only contributions

The levy allowance

The levy allowance of £15,000 will apply in each tax year. Employers can use the allowance to offset against their levy liability, subject to the connected companies and charities rules. The levy liability will be calculated monthly with the operation of the annual allowance being offset on a cumulative pro-rata basis.

If you have different payroll frequencies

An employer may have different payroll frequencies across a taxable year.

How to apportion the allowance and when to report it

If you are an employer that has payroll with a mixture of frequencies (for example, monthly and yearly, or weekly and half yearly) then the allowance must be apportioned and reported across the 12 tax months of the year.

For example, if a company is allocated the full annual £15,000 allowance, then the monthly apportionment will be £1250.

The Apprenticeship Levy is a charge on an employer’s monthly pay bill. The employer must calculate their monthly pay bill and offset their apportionment of the monthly levy allowance against the charge.

If you are working out pay that is subject to National Insurance contributions for the calculation of the PAYE (Pay As You Earn) month, then you should include the yearly frequency value in the PAYE month that the pay date falls in.

Who will pay the Apprenticeship Levy and when

Subject to the connected companies rules, only employers with annual pay bills greater than £3 million will pay the Apprenticeship Levy.

The due date for payment will be 14 or 17 days after the end of each tax period depending on the employer’s payment method. This would be their levy liability for that current tax period (the current month of the tax year), less any levy liability paid to HMRC in the previous tax period.

How to report the Apprenticeship Levy

Employers only need to report the Apprenticeship Levy to HMRC if they are likely to have a liability to pay it. This will be where:

• the annual pay bill in the previous tax year that was liable to Class 1 secondary National Insurance contributions was over £2.8 million
• they believe it will be over £3 million in the current year
• connected employers who allocate the allowance across their group, the allocation is such that the employer believes they are liable to pay the levy

The levy will be reported as part of the normal payroll process using the Employer Payment Summary (EPS) within their software package or by using Basic PAYE Tools.

When an employer starts submitting levy submissions, they will need to continue to make submissions even if their levy amount due in the year to date for any following months is zero.

Location of an employee

All UK employers with a Class 1 National Insurance contributions liability are liable to pay the Apprenticeship Levy.

The location of an employee within the UK does not affect how much levy the employer pays. It only affects the maximum amount that the employer can spend through their digital apprenticeship service account.

Connected companies and charities

The government has made an amendment to the Finance Bill 2016 to allow connected companies or charities to share the levy allowance between them, rather than stipulating that just one employer out of a group of employers will receive it. If this applies, each employer will claim their portion of the allowance against their levy liability due, but no more than £15,000 in total can be claimed by the group of employers as a whole.

In a similar way, an employer with more than one PAYE scheme will have the option to split the allowance as they choose across their PAYE schemes. This will enable the employer to divide the allowance they have between their multiple PAYE schemes (but not exceed the total £15,000 annual levy allowance) and calculate the levy due accordingly.

The split of the allowance must be agreed at the beginning of the tax year and fixed for that year. Employers who are part of a connected group will not be able to change the amount of levy allowance in year.

Calculating the apprenticeship levy due and how the allowance is allocated

To arrive at the monthly ‘pay bill’ the employer will add all the employee earnings subject to Class 1 secondary National Insurance contributions (from each of the paydays in the tax month) together.

The 0.5% rate will be applied to this sum to calculate the levy liability for that tax month, before the pro-rated cumulative monthly allowance is applied.

Employers will offset the cumulative monthly allowance against the cumulative monthly levy liability in order to calculate the apprenticeship levy payable for each tax month.

A twelfth of the £15,000 annual allowance can be claimed in each month of the tax year on a cumulative basis, subject to the connected companies and charities rules.

Example

£15,000 over 12 months equals £1,250.

Month 1 — £1,250
Month 2 — £1,250 × 2 = £2,500
Month 3 — £1,250 × 3 = £3,750

And so on to Month 12

Month 12 — £1,250 x 12 = £15,000

The cumulative nature of the allowance means that, even if a pay bill increases, ‘carried over’ allowance may mean that an employer does not have to pay anything in levy until they have used up the entirety of their allowance.

Example 1 — regular pay bill of £250,000 each month

In this example, the total pay bill is £3 million for the tax year so no levy is due.

Month 1

£250,000 × 0.5% = £1,250 levy
Cumulative levy allowance is £1,250 (which is the £15,000 annual levy allowance divided by 12)
Levy payable to month 1 is £0 (£1,250 – £1,250)

Month 2

£500,000 (£250,000 + £250,000) × 0.5% = £2,500
Cumulative levy allowance is £2,500
Levy payable to month 2 is £0
Levy paid in month 2 is £0 (levy payable to month 2 (£0) – levy paid up to month 1 (£0))

Month 12

£3 million (£250,000 × 12) × 0.5% = £15,000
Cumulative levy allowance is £15,000
Levy payable to month 12 is £0
Levy paid in month 12 is £0 (levy payable to month 11 (£0) – levy paid up to month 12 (£0))

Example 2 — regular pay bill of £300,000 each month

In this example, the total pay bill is £3.6 million for the tax year.

Month 1

£300,000 × 0.5% = £1,500 levy
Cumulative levy allowance is £1,250
Levy payable to month 1 is £250 (£1,500 – £1,250)

Month 2

£600,000 (£300,000 + £300,000) × 0.5% = £3,000 levy
Cumulative levy allowance is £2,500
Levy payable to month 2 is £500 (£3,000 – £2,500)
Levy paid in month 2 is £250 (levy payable to month 2 (£500) – levy paid up to month 1 (£250))

Month 12

£3.6 million (£300,000 × 12) × 0.5% = £18,000 levy
Cumulative levy allowance is £15,000
Levy payable to month 12 is £3,000 (£18,000 – £15,000)
Levy paid in month 12 is £250 (levy payable to month 11 (£3,000) – levy paid up to month 12 (£2,750))

This means that the organisation pays £250 each month in levy, which totals £3,000 over the full year.

Example 3 — regular pay bill of £353,410.56 each month

In this example, the total pay bill is £4,240,926.72 for the tax year.

Month 1

£353,410.56 × 0.5% = £1,767 levy
Cumulative levy allowance is £1,250
Levy payable to month 1 is £517 (£1,767 – £1,250)

Month 2

£706,821.12 × 0.5% = £3,534 levy
Cumulative levy allowance is £2,500
Levy payable to month 2 is £1,034 (£3,534 – £2,500)
Levy paid in month 2 = £517 (levy payable to month 2 (£1,034) – levy paid up to month 1 (£517))

Month 12

£4,220,926.74 (353,410.56) × 0.5% = £21,204 levy
Cumulative levy allowance is £15,000
Levy payable to month 2 is £6,204 (£21,204 – £15,000)
Levy paid in month 12 = £517 (levy payable to month 11 (£6,204) – levy paid up to month 12 (£5,687))

This means that the organisation pays £517 each month in levy, which totals £6,204 over the full year.

Example 4 — seasonal pay bill

The organisation has a total pay bill of £3 million over the year but the pay bill fluctuates, with the peak in June (month 3) and July (month 4).

The pay bill is £200,000 in:

• April (month 1)
• May (month 2)
• August (month 5)
• September (month 6)
• October (month 7)
• November (month 8)
• December (month 9)
• January (month 10)
• February (month 11)
• March (month 12)

The pay bill is £500,000 in:

• June (month 3)
• July (month 4)

Month 1

£200,000 × 0.5% = £1,000 levy
Cumulative levy allowance is £1,250
Levy payable to month 1 is £0 as levy is less than the cumulative levy allowance

Month 2

£400,000 (£200,000 + £200,000) × 0.5% = £2,000 levy
Cumulative levy allowance is £2,500
Levy payable to month 2 is £0 as £2,000 levy is less than the cumulative levy allowance
Levy paid in month 2 is £0 (levy payable to month 2 (£0) – levy paid up to month 1 (£0))

Month 3

£900,000 (£200,000 + £200,000 + £500,000) × 0.5% = £4,500
Cumulative levy allowance is £3,750
Levy payable to month 3 is £750 (£4,500 – £3,750)
Levy paid in month 3 is £750 (levy payable to month 3 (£750) – levy paid up to month 2 (£0))

Month 4

£1,400,000 (£200,000 + £200,000 + £500,000 + £500,000) × 0.5% = £7,000
Cumulative levy allowance is £5,000
Levy payable to month 4 is £2,000 (£7,000 – £5,000)
Levy paid in month 4 is £1,250 (levy payable to month 4 (£2,000) – levy paid up to month 3 (£750))

Month 5

£1,600,000 (£200,000 + £200,000 + £500,000 + £500,000 + £200,000) × 0.5% = £8,000
Cumulative levy allowance is £6,250
Levy payable to month 5 is £1,750 (£8,000 – £6,250)
Levy paid in month 5 is –£250 (levy payable to month 5 (£1,750) – levy paid up to month 4 (£2,000))

The employer would get a credit of £250 in month 5 that may be used to offset against other PAYE liabilities.

Month 6

£1,800,000 (£200,000 + £200,000 + £500,000 + £500,000 + £200,000 + £200,000) × 0.5% = £9,000
Cumulative levy allowance £7,500
Levy payable to month 6 is £1,500 (£9,000 – £7,500)
Levy paid in month 6 = –£250 (levy payable to month 6 (£1,500) – levy paid up to month 5 (£1,750))

The employer would get a credit of £250 in month 6 that may be used to offset against other PAYE liabilities.

Based on the calculation, the employer would continue to get credit of £250 in months 7 to 12.

Tax month	Pay bill	Cumulative pay bill	Cumulative rate (0.5%)	Cumulative allowance	Cumulative levy	Levy paid per month (in £ pounds)
April (1)	£200,000	£200,000	£1,000	£1,250	£0	£0
May (2)	£200,000	£400,000	£2,000	£2,500	£0	£0
June (3)	£500,000	£900,000	£4,500	£3,750	£750	£750
July (4)	£500,000	£1,400,000	£7,000	£5,000	£2,000	£1,250
August (5)	£200,000	£1,600,000	£8,000	£6,250	£1,750	-£250
September (6)	£200,000	£1,800,000	£9,000	£7,500	£1,500	-£250
October (7)	£200,000	£2,000,000	£10,000	£8,750	£1,250	-£250
November (8)	£200,000	£2,200,000	£11,000	£10,000	£1,000	-£250
December (9)	£200,000	£2,400,000	£12,000	£11,250	£750	-£250
January (10)	£200,000	£2,600,000	£13,000	£12,500	£500	-£250
February (11)	£200,000	£2,800,000	£14,000	£13,750	£250	-£250
March (12)	£200,000	£3,000,000	£15,000	£15,00	£0	-£250

Example 5 — a unit of companies with equal allowance

In this example, a unit of 3 companies splits the £15,000 allowance equally. This means each company gets an allowance of £5,000 across the year.

Each company has a monthly pay bill of £250,000, which equals a total pay bill across the tax year of £3 million. The following calculations apply to each of the 3 companies.

Month 1

£250,000 × 0.5% = £1,250 levy
Cumulative levy allowance is £416.66 (which is the £5,000 allowance for each company divided by 12 months)
Levy payable to month 1 is £833 (£1,250 – £316.66)

Month 2

£500,000 (£250,000 + £250,000) × 0.5% = £2,500
Cumulative levy allowance is £833.32
Levy payable to month 2 is £1666 (£2,500 – £833.32)
Levy paid in month 2 is £833 (levy payable to month 2 (£1,666) – levy paid up to month 1 (£833))

Month 12

£3 million (£250,000 × 12) × 0.5% = £15,000
Cumulative levy allowance is £5,000
Levy payable to month 12 is £100,000.08 (£15,000 – £5,000)
Levy paid in month 12 is £833 (levy payable to month 12 (£100,000.08) – levy paid to month 11 (£9,166.74))

All 3 companies will pay the same because they’ve been allocated the same amount of allowance and their monthly pay bills are the same. Due to the rules on rounding down and truncating, there are instances where in reality the employer may receive less than the allocated allowance. The levy due year to date figure is rounded down to the whole pound in the customer’s favour.

For example, in example 4, where the employer receives 8 pence less than £5,000 in allowance for the year. The rules on rounding are in place to ensure that employers do not accidentally exceed the £15,000 allowance.

Example 6 — a unit of companies with different allowances

In this example, a unit of 3 companies have different levy allowances.

Company A and company B both received an allowance of £7,500 each. Both companies have monthly pay bills of £250,000 and annual pay bills of £3 million.

Company C received an allowance of £0, and has a monthly pay bill of £100,000 with an annual pay bill of £1.2 million.

The following calculations apply to company A and company B.

Month 1

£250,000 × 0.5% = £1,250 levy
Cumulative levy allowance = £625 (which is the £7,250 allowance for each company divided by 12 months)
Levy payable to month 1 is £625 (£1,250 – £625)

Month 2

£500,000 (£250,000 + £250,000) × 0.5% = £2,500
Cumulative levy allowance is £1,250
Levy payable to month 2 is £1,250 (£2,500 – £1,250)
Levy paid in month 2 is £625 (levy payable to month 2 (£1,250) – levy payable to month 1 (£625))

Month 12

£3 million (£250,000 × 12) × 0.5% = £15,000
Cumulative levy allowance is £7,500
Levy payable to month 12 is £7,500 (£15,000 – £7,500)
Levy paid in month 12 is £625 (levy payable to month 12 (£7,500) – levy paid to month 11 (£6,875))

The following calculations apply to company C.

Month 1

£100,000 × 0.5% = £500
Cumulative levy allowance is £0
Levy payable to month 1 is £500 (£500 – £0)

Month 2

£200,000 (£100,000 + £100,000) × 0.5% = £1000
Cumulative levy allowance is £0
Levy payable to month 2 is £1,000
Levy paid in month 2 is £500 (levy payable to month 2 (£1,000) – levy paid to month 1 (£500))

Month 12

£1.2 million (£100,000 × 12) × 0.5% = £6,000
Cumulative levy allowance is £0
Levy payable to month 12 is £6,000
Levy paid in month 12 is £500 (levy payable to month 12 (£6,000) – levy paid to month 11 (£5,500))

Levy payments, allowances and calculations

Is it expected that the levy payment will form part of the monthly PAYE payment to HMRC.

If you need to make an in-year adjustment to the levy allowance amount

You should update your next submission to include the correct apprenticeship levy allowance to date. This will provide the correct cumulative apprenticeship levy due to date.

If you need to correct or update a post-year levy calculation

The apprenticeship levy is reported on the EPS. If you need to correct a previous year then you must send another EPS for the tax year that requires a correction or update.

How to apply the apprenticeship levy allowance if you are a business that only operates for part of the year

Sometimes an employer may operate for only part of a tax year, for example where:

• a business has started up mid-year
• a business goes into liquidation part way through the year

In these instances, the full annual allowance of £15,000 for the full tax year can be used.

Example — a business goes into liquidation

The business will still be entitled to the full annual allowance subject to the connected companies’ and charities rules. The business has a pay bill of £300,000 per month.

Month 1

£300,000 × 0.5% = £1,500 levy
Cumulative levy allowance for month 1 = £1,250
Levy payable to month 1 is £1,250 (£1,500 - £1,250)

Month 2

The business goes into liquidation.

The cumulative pay bill for month 2 is £600,000 (£300,000 + £300,000).

The apprenticeship levy liability that the business has accrued over the 2 months of the tax year is £3,000 (£600,000 × 0.5%).

This will be offset entirely by the full £15,000 annual allowance that is available to it, despite it only operating for part of the year. This means the £250 levy payment made in month 1 will be offset against other PAYE liabilities.

This is subject to the connected rules, which will allow a unit of companies to split the allowance. If the business is part of a unit of companies, they may not get the full £15,000 annual levy allowance.

Refunds

Refunds to customers will work in the way as the existing refunds process, which confirms if there is a credit on the account. Credits will be either:

• used to clear older charges that are due
• held on the account pending future charges, unless a refund is specifically asked for

Third party payroll software calculation and submission requirements

Apprenticeship levy

When calculating apprenticeship levy, there are a few requirements and validation rules that will be needed to provide the levy due year to date.

Total pay bill

You should use or input the relevant total pay bill to date that is subject to Class 1 Secondary National Insurance contributions for the scheme. You must allow for corrections and updates.

There should be a validation rule of a field length to 12 digits and 2 decimal places. For example, £9,999,999,999.99.

Calculate the levy

You should calculate the levy due at the rate of 0.5% on the total relevant pay bill to date. This calculation should then be rounded down to the whole pound (£).

For example:

• £467,487 × 0.5% = £2,337.435 — this would be rounded down to £2,337
• £467,523 × 0.5% = £2,337.615 — this would be rounded down to £2,337

There should be a validation rule for the rate to be defined for the whole year, with an initial parameter set to 0.5%. This should be updateable.

Tax year and tax month

The tax year and the appropriate tax month must be selected to allow the calculation of the levy allowance.

There should be a validation rule for Apprenticeship Levy only that the tax year cannot be before the 2017 to 2018 tax year.

Levy allowance calculation

When calculating the levy allowance, there are a few requirements and validation rules that will be needed.

Annual levy allowance amount

The annual levy allowance should be inputted in the range of £0 to £15,000. This must allow for corrections and updates.

Monthly levy allowance

The monthly levy allowance amount should be calculated and rounded to 2 decimal places.

Levy allowance year to date

The levy allowance year to date should be calculated and rounded to 2 decimal places.

Levy due year to date

Deduct the levy allowance year to date from the from levy (the cumulative pay bill multiplied by 0.5%) to get the levy due year to date. This should be rounded down to the whole pound in favour of the customer.

Changes and recalculations

Where a total pay bill for an earlier year changes, you should allow for a recalculation of levy liability for the year following the end of the tax year. There should be a validation rule that allows recalculation up to 6 years from now but not before the 2017 to 2018 tax year.

Reporting results

Results should be reported through EPS.

The report should be provided monthly if the business payroll is:

• weekly
• fortnightly
• 4 weekly

The report should be provided:

• quarterly, if the business payroll runs every quarter
• 6 monthly, if the business payroll runs every 6 months
• annually, if the business payroll runs annually

Employers should provide the following information through the reports in EPS:

• the cumulative levy due to date amount — validation rules apply, including:
  • a mandatory maximum amount, inclusive of 99999999.00, defined as whole pounds (no negative values and non-zero pence values are allowed)
  • a mandatory minimum amount inclusive of 0.00, defined as whole pounds (no negative values and non-zero pence values are allowed)
• the tax year the levy relates to — a validation rule that the tax year cannot be before the 2017 to 2018 applies
• the tax month for the levy due to date amount — a validation rule that this must be in the range of 1 to 12 with no leading zeros applies
• the total annual levy allowance amount allocated — this is mandatory and validation rules apply, including:
  • a mandatory maximum amount, inclusive of 15000.00 (pence are allowed but no negative values are allowed)
  • a mandatory minimum amount inclusive of 0.00 (pence are allowed but no negative values are allowed)
• if applicable and where the total pay bill for an earlier year changes, the submission of recalculated levy liability following the end of the tax year — a validation rule that allows recalculation up to 6 years from now but not before the 2017 to 2018 tax year applies