The Apprenticeship Levy – how the calculation will work

From 6 April 2017, the apprenticeship levy will be due from any UK employer, in any sector, if their annual pay bill is more than £3 million. For the purposes of the levy, an ‘employer’ is someone who is a secondary contributor, with liability to pay Class 1 secondary National Insurance contributions (NICs) for their employees.

The levy will be charged at a rate of 0.5% of an employer’s annual pay bill. Each employer will have an annual levy allowance of £15,000 (being 0.5% of £3 million) to offset against the levy they must pay.

The levy will be paid to HMRC through the PAYE.

On 12 August 2016, HMRC added some further details to the GOV.UK website www.gov.uk/government/publications/apprenticeship-levy-how-it-will-work/apprenticeship-levy-how-it-will-work

This guidance includes the following two examples of how the calculation of the levy will work:

Example 1: an employer who would pay the levy

An employer with an annual pay bill of £5,000,000:

levy sum: 0.5% x £5,000,000 = £25,000
subtracting levy allowance: £25,000 - £15,000 = £10,000 annual levy payment

Example 2: an employer who would not have to pay the levy

An employer with an annual pay bill of £2,000,000:

levy sum: 0.5% x £2,000,000 = £10,000
subtracting levy allowance: £10,000 - £15,000 = £0 annual levy payment

The above examples are somewhat simplistic. They do not highlight that the levy allowance is to be provided in equal monthly instalments of £1,250, in contrast to an up-front block (which is how the Employment Allowance is provided). Therefore, the examples do not demonstrate the impact of significant fluctuations in the pay bill accruing throughout the year. Take, for example, the following scenario where the pay bill totals £3 million but has a seasonal peak to it in June and July:

PAY BILL TAX MONTH
£200,000 1
£200,000 2
£500,000 3
£500,000 4
£200,000 5
£200,000 6-12
   
£3 million   

 

The calculation of the levy each month would be as follows:

Month 1:  £200K x 0.5% = £1,000 levy

Cumulative levy allowance = £1,250, i.e.

Levy payable month 1 is NIL as £1,000 levy is less than the cumulative allowance

Month 2:   £400K (£200K + £200K) x 0.5% = £2,000

Cumulative levy allowance £2,500

Levy payable to month 2 is NIL as £2,000 levy is less than the cumulative allowance (£2,500)

Levy paid in month 2 = levy payable to month 2 – levy paid to month 1 = 0 – 0 = 0

Month 3:  £900K (£200K + £200K + £500K) x 0.5% = £4,500

Cumulative levy allowance £3,750

Levy payable to month 3 is £4,500 - £3,750 = £750

Levy paid in month 3 = levy payable to month 3 – levy paid to month 2 = £750 – 0 = £750
 

Month 4:  £1400K (£200K + £200K + £500K + £500K) x 0.5% = £7,000

Cumulative levy allowance £5,000

Levy payable to month 4 is £7,000 - £5,000 = £2,000

Levy paid in month 4 = levy payable to month 4 – levy paid to month 3 = £2,000 – £750 = £1,250
 

Month 5:  £1,600K (£200K + £200K + £500K + £500K + £200K) x 0.5% = £8,000

Cumulative levy allowance £6,250

Levy payable to month 5 is £8,000 - £6,250 = £1,750

Levy paid in month 5 = levy payable to month 5 – levy paid to month 4 = 1,750 – 1,250 - 750 = -£250

Therefore the employer gets a credit of £250 that month that may be used to offset against other PAYE liabilities.

Month 6:  £1,800K (£200K + £200K + £500K + £500K + £200K + £200K) x 0.5% = £9,000

Cumulative levy allowance £7,500

Levy payable to month 6 is £9,000 - £7,500 = £1,500

Levy paid in month 6 = levy payable to month 6 – levy paid to month 5 less credits paid to month 5

= £1,500 – 1,250 - 750 – (-£250) = -£250

Therefore the organisation gets a further credit in month 6 of £250 to set against their PAYE liabilities.

The calculation continues in the same manner for each of the months 7 -12 where the firm gets a credit of £250 in each month. The whole position for the year can be seen in the following table:-

Cumulative                                   Cumulative               

Tax Month Pay Bill Pay Bill Pay Bill x 0.5% Allowance Levy  Paid per month
1 £200,000 £200,000  £1000 £1250 £0 £0
2 £200,000 £400,000 £2000 £2500 £0 £0
3 £500,000 £900,000 £4500 £3750 £750 £750
4 £500,000 £1,400,000 £7000 £5000 £2000 £1250
5 £200,000 £1,600,000 £8000 £6250 £1750 -£250
6 £200,000 £1,800,000 £9000 £7500 £1500 -£250
7 £200,000 £2,000,000 £10,000 £8750 £1250 -£250
8 £200,000 £2,200,000 £11,000 £10,000 £1000 -£250
9 £200,000 £2,400,000 £12,000 £11,250 £750 -£250
10 £200,000 £2,600,000 £13,000 £12,500 £500 -£250
11 £200,000 £2,800,000 £14,000 £13,750 £250 -£250
12 £200,000 £300,000 £15,000 £15,000 £0 -£250
Total           £0

 

So, even though the pay bill does not exceed £3 million for the year and there is no levy due overall, the employer must still make payments of the levy in months 3 and 4 and then receive refunds of the amount overpaid in increments of £250 a month.

It is hoped that legislation will be introduced shortly to prevent the above long-winded calculations having to be carried out where the overall paybill is £3 million or less but is affected by fluctuating pay.