Apprenticeship Levy: Benefits & Challenges 2026

The apprenticeship landscape has changed significantly over recent years, providing greater opportunities for individuals to combine work with study to gain skills and knowledge in a structured and regulated environment, and for businesses to benefit from recruiting, developing and retaining talent aligned to their operational needs.

For UK employers, apprenticeships are no longer limited to entry-level roles or young school leavers. The modern apprenticeship system supports training across a wide range of occupations and seniority levels, enabling businesses to build capability internally, address skills shortages and invest in long-term workforce development. In England, apprenticeships are primarily delivered against approved apprenticeship standards (with older apprenticeship frameworks now largely legacy), and this shift has been reinforced by changes to public funding and the introduction of the apprenticeship levy, which places employers at the centre of skills investment decisions.

The Apprenticeship Levy, introduced in April 2017, is a UK government initiative designed to increase employer investment in skills development through apprenticeships. Employers with an annual pay bill exceeding £3 million are required to contribute 0.5% of their payroll towards the levy, with funds held in a digital account and made available to support apprenticeship training and assessment. For employers below the levy threshold, government funding remains available through a co-investment model.

What this article is about

This guide explains what the apprenticeship levy means for employers, how it operates in practice, who is required to pay it, and how levy and non-levy funding can be used lawfully and strategically. It also examines the legal and practical considerations when hiring apprentices, helping employers understand both their funding opportunities and their compliance responsibilities under UK employment and training law.

Section A: What is the Apprenticeship Levy?

The apprenticeship levy is a statutory charge introduced by the UK government as part of a wider reform of skills funding. It applies to larger employers and is collected through the PAYE system alongside other payroll liabilities. The policy objective behind the levy is to increase the quantity and quality of apprenticeships by shifting greater responsibility for training investment onto employers themselves, rather than relying primarily on central government funding.

Initiated in 2017, the levy requires employers with an annual pay bill of more than £3 million to contribute 0.5% of their payroll. These contributions are paid to HMRC and credited to the employer’s digital apprenticeship service account, where they can be used to fund approved apprenticeship training and end-point assessment. Employers can choose how and when to use these funds, provided they comply with the apprenticeship funding rules and eligibility requirements.

A key feature of the apprenticeship levy is that it is designed not simply as a tax, but as a ring-fenced training investment. Employers that pay the levy retain control over how their funds are spent, allowing them to tailor apprenticeship programmes to the skills needs of their organisation. Where levy funds are not used within the permitted timeframe, they expire and are removed from the employer’s account. Expired funds revert to the wider apprenticeship funding system (rather than being directly allocated to specific businesses), where they support apprenticeship funding across the economy. Employers can, however, choose to support other organisations directly through the separate levy transfer mechanism.

1. Why the apprenticeship levy was introduced

The levy was introduced in response to long-standing concerns about skills shortages in the UK workforce and underinvestment in vocational training. Prior to 2017, apprenticeship funding relied heavily on public expenditure, with more limited employer influence over how training budgets were allocated. The levy model sought to change this by incentivising employers to take ownership of skills development and to integrate apprenticeships into their workforce planning.

By requiring larger employers to contribute financially, the government aimed to increase apprenticeship starts, improve training quality, and ensure that apprenticeship standards reflect real occupational needs. The levy also supports the development of higher-level apprenticeships, including degree apprenticeships, enabling employers to train staff to advanced professional levels without relying solely on traditional academic pathways.

2. Is the apprenticeship levy a tax or a training investment?

Although the apprenticeship levy is collected in a similar way to a tax, its practical function is distinct. Levy payments are not simply treated as general taxation from the employer’s perspective; instead, qualifying funds are credited to an employer-specific digital account and can be used to pay for eligible apprenticeship training and end-point assessment. This means that employers who engage actively with the apprenticeship system can recover the value of their levy contributions by investing in their workforce.

It is a common misconception that apprenticeship levy funding can only be used for recruiting new or young apprentices. In practice, levy funds can be used to train both new recruits and existing employees, across a wide range of ages and seniority levels. This includes employees who already hold higher education qualifications, provided the apprenticeship represents a substantive new role or skillset and meets the requirements of an approved apprenticeship standard.

By enabling employers to upskill and reskill their workforce, the levy supports organisational resilience and adaptability in changing economic and technological conditions. Employers that understand how the levy operates can use it as a strategic tool to address skills gaps, improve retention and reduce long-term recruitment costs.

3. Who benefits from the apprenticeship levy system?

While the levy applies only to employers above a defined pay bill threshold, the broader apprenticeship funding system benefits organisations of all sizes. Levy-paying employers gain access to a dedicated training budget, while non-levy employers can draw on government funding supported by the overall apprenticeship funding system, including funds that have expired from levy-paying employers’ accounts.

The system is intended to support collaboration across sectors and supply chains, particularly through the ability of levy-paying employers to transfer a proportion of their unused funds to other employers. This enables smaller businesses and charities to access apprenticeship training that might otherwise be unaffordable, while allowing levy-payers to maximise the value of their contributions.

4. Section A summary

The apprenticeship levy is a mandatory payroll charge for larger employers, designed to place businesses at the heart of skills development in the UK. Although collected like a tax, it operates as a training investment that can be used for eligible apprenticeship training and end-point assessment. If levy funds are not used within the permitted timeframe, they expire and revert to the wider apprenticeship funding system rather than being directly allocated to particular businesses. When used effectively, the levy allows employers to develop talent, address skills shortages and integrate apprenticeships into long-term workforce planning, while supporting a wider, employer-led apprenticeship system across the economy.

Section B: Who Pays the Apprenticeship Levy?

The obligation to pay the apprenticeship levy is determined by the size of an employer’s annual pay bill. The levy applies to employers operating in the UK whose total pay bill exceeds the statutory threshold, regardless of sector, industry or organisational structure. Understanding how liability is assessed is critical, particularly for employers with complex payroll arrangements or group structures.

1. The £3 million pay bill threshold

The apprenticeship levy applies to employers with an annual pay bill of more than £3 million. The pay bill is calculated as the total amount of earnings on which an employer is liable to pay Class 1 secondary National Insurance contributions. This includes salaries, wages, bonuses, commissions and other taxable earnings paid through PAYE.

The assessment is made across the tax year and applies to the total payroll cost, not to individual employees’ earnings. There is no upper cap on levy liability, meaning that the levy increases proportionally with the size of the employer’s pay bill once the threshold is exceeded.

Employers should be aware that levy liability is assessed by reference to actual payroll figures rather than employee headcount. An organisation with a relatively small number of highly paid employees may exceed the threshold, while a larger employer with lower average wages may not.

2. Connected companies and group structures

Where an employer is connected to other companies or charities, the pay bills of those entities must be aggregated to determine whether the £3 million threshold is exceeded. The rules on connected employers broadly mirror those used for employment allowance purposes and are intended to prevent artificial fragmentation of payroll to avoid levy liability.

Connected entities may include parent companies, subsidiaries or organisations under common control. Where the combined pay bill of connected employers exceeds £3 million, the apprenticeship levy applies to the group as a whole, even if individual entities would fall below the threshold if assessed independently.

In these circumstances, connected employers are required to share a single annual levy allowance of £15,000 between them. The allocation of this allowance must be agreed at the start of the tax year and applied consistently for that year. While the allocation can be changed, any change can only take effect from the beginning of a new tax year, making forward planning essential for groups with fluctuating payrolls.

3. Employers with fluctuating or growing pay bills

Employers whose pay bill fluctuates around the £3 million threshold need to monitor their payroll carefully. Levy liability arises as soon as the threshold is exceeded based on actual payroll figures, even if this occurs part way through a tax year. Once the threshold is crossed, the employer must begin calculating, reporting and paying the levy through PAYE for each relevant tax period.

If an employer’s pay bill later falls below the threshold after levy payments have started, the employer must continue to report levy payments for the remainder of the tax year. Any overpayment is reconciled through the PAYE system and may be credited or refunded after the end of the tax year.

This means that employers experiencing growth, mergers, acquisitions or unexpected increases in payroll costs should anticipate potential levy liability and factor this into financial and workforce planning.

4. Employers already paying other training levies

The apprenticeship levy is payable by all employers that meet the threshold, even if they already contribute to other industry-wide or sector-specific training levies or arrangements. There is no exemption for employers that fund training through professional bodies, regulators or voluntary schemes.

Employers in regulated or specialist sectors may, however, be able to use apprenticeship levy funds to support accredited training pathways where these align with approved apprenticeship standards and comply with the apprenticeship funding rules.

5. Employers below the levy threshold

Employers with an annual pay bill below £3 million, and who are not connected to other employers with a combined pay bill exceeding the threshold, are not required to pay the apprenticeship levy. These organisations are commonly referred to as non-levy-paying employers.

Although non-levy employers do not contribute directly to the levy, they can still access government funding to support apprenticeship training through co-investment arrangements or through levy fund transfers from levy-paying employers.

6. Common mistakes when assessing levy liability

Employers frequently underestimate their exposure to the apprenticeship levy by focusing on employee numbers rather than payroll value, or by overlooking the impact of connected companies and group structures. Another common error is assuming that one-off payments, such as bonuses or commissions, are excluded from the pay bill calculation, when in fact these payments are subject to Class 1 National Insurance and therefore count towards levy liability.

Failure to monitor payroll changes or to account for organisational restructuring can result in late or incorrect levy reporting, creating compliance risks and administrative complications. Employers should ensure that payroll, finance and HR teams are aligned in assessing levy exposure and managing ongoing reporting obligations.

7. Section B summary

The apprenticeship levy applies to employers with an annual pay bill exceeding £3 million, including groups of connected companies whose combined payroll meets the threshold. Liability is based on total earnings subject to Class 1 National Insurance, not employee numbers, and must be assessed using actual payroll data. Employers with complex structures or fluctuating pay bills must monitor their position carefully to ensure accurate levy reporting and effective use of the available levy allowance.

Section C: How Much is the Apprenticeship Levy?

The amount an employer pays under the apprenticeship levy is directly linked to the size of their annual pay bill. Once an employer exceeds the £3 million threshold, the levy is charged as a fixed percentage of total payroll costs that are subject to Class 1 secondary National Insurance contributions. While the calculation itself is relatively straightforward, the interaction between the levy rate, the annual allowance and payroll fluctuations can create complexity in practice.

1. The apprenticeship levy rate

Employers that meet the levy threshold are required to pay 0.5% of their annual pay bill as the apprenticeship levy. This is calculated on the total value of earnings paid through PAYE that attract employer National Insurance, including wages, salaries, bonuses and commissions.

Although the levy is an annual charge, it is calculated, reported and paid on a monthly basis alongside other PAYE liabilities. Each month, employers assess their actual payroll for that tax period, apply the levy rate and offset the relevant proportion of the annual allowance. Levy reporting is therefore based on actual payroll data for each PAYE period, rather than forward-looking estimates.

2. The £15,000 annual levy allowance

All employers that are liable to pay the apprenticeship levy are entitled to an annual levy allowance of £15,000. This allowance reduces the amount of levy payable and effectively means that employers only begin paying the levy once their pay bill exceeds £3 million.

The allowance is applied evenly across the tax year, with one-twelfth of the allowance offset against the levy charge each month. For employers that are part of a group of connected companies or charities, the £15,000 allowance must be shared across the group. The allocation must be agreed at the start of the tax year and applied consistently for that year, with any changes only taking effect from the beginning of a subsequent tax year.

3. Example levy calculation

By way of illustration, an employer with an annual pay bill of £5 million would have a gross levy liability of £25,000, calculated as 0.5% of £5 million. After applying the £15,000 annual allowance, the net levy payable for the year would be £10,000.

This net amount is not paid as a single annual sum but is spread across the tax year through monthly PAYE payments. The same principles apply to employers with larger pay bills, with levy liability increasing proportionally as payroll costs rise.

4. Payroll fluctuations and levy liability

Payroll is rarely static, and employers need to understand how fluctuations affect levy payments. Where an employer’s pay bill increases part way through the tax year and exceeds the £3 million threshold based on actual payroll figures, levy liability arises from that point onwards. The employer must begin calculating and reporting levy payments through PAYE for each relevant tax period.

If an employer’s pay bill later falls below the threshold after levy payments have started, the employer must continue to report levy payments for the remainder of the tax year. Any overpayment of the levy is reconciled through the PAYE system and may be credited or refunded after the end of the tax year.

This approach reflects the fact that levy liability is assessed dynamically using actual payroll data, rather than being fixed by reference to projections made at the start of the year.

5. Reporting and payment obligations

Employers must report their apprenticeship levy liability to HMRC through the PAYE system each month, using the Full Payment Submission or Employer Payment Summary as appropriate. Accurate reporting is essential, as errors can delay the crediting of funds to the employer’s apprenticeship service account or result in compliance issues.

Employers should ensure that payroll systems are configured correctly to calculate the levy and apply the annual allowance on a monthly basis, and that payroll, finance and HR teams understand their respective roles in managing levy compliance.

6. Section C summary

The apprenticeship levy is charged at 0.5% of an employer’s annual pay bill, subject to a £15,000 annual allowance that effectively sets the levy threshold at £3 million. Levy payments are calculated and reported monthly through PAYE using actual payroll data and can be affected by payroll fluctuations during the tax year. Employers must understand how the allowance operates and how changes in payroll impact liability to ensure accurate reporting and effective financial planning.

Section D: How Apprenticeship Levy Funding Works

Paying the apprenticeship levy gives employers access to a dedicated training budget, held within the government’s apprenticeship service. Understanding how levy funds are credited, managed and spent is essential if employers are to maximise the value of their contributions while remaining compliant with the apprenticeship funding rules.

1. Accessing levy funds through the apprenticeship service

Levy funds are accessed through the apprenticeship service, an online digital platform operated by the Education and Skills Funding Agency (ESFA). Employers that pay the levy must create an apprenticeship service account in order to receive, manage and spend their funds. The account acts as a central hub for selecting training providers, managing apprentices and authorising payments for training and assessment.

Once levy payments are made to HMRC through PAYE, the corresponding funds are credited to the employer’s apprenticeship service account on a monthly basis. The amount credited reflects the levy paid for that period, adjusted by reference to the proportion of the employer’s pay bill attributable to employees who live in England.

2. Government top-up and territorial allocation

For levy-paying employers with employees who live in England, the government applies a 10% top-up to the funds entering the apprenticeship service account. This top-up is added automatically and increases the total value of funds available for apprenticeship training and end-point assessment.

Although the apprenticeship levy is paid to HMRC on a UK-wide basis, apprenticeship funding is devolved. The funds credited to an employer’s apprenticeship service account are therefore calculated by reference to the proportion of the employer’s pay bill paid to employees who live in England. Employers with staff based in Scotland, Wales or Northern Ireland continue to pay the levy, but access to apprenticeship funding in those nations is administered through the relevant devolved authorities rather than the English apprenticeship service.

3. What levy funds can be used for

Levy funds can only be used to pay for apprenticeship training and end-point assessment delivered by approved training providers and end-point assessment organisations. Training must relate to an approved apprenticeship standard and be delivered in accordance with the apprenticeship funding rules issued by the ESFA.

Employers cannot use levy funds to cover apprentice wages, recruitment costs, travel or subsistence expenses, managerial time, capital equipment or the cost of setting up an apprenticeship programme. These costs must be met from the employer’s general business funds. Using levy funds outside the permitted scope can result in recovery of funding and restrictions on future access to apprenticeship funding.

4. Fund expiry and rolling time limits

Levy funds do not remain available indefinitely. Funds entering an employer’s apprenticeship service account expire 24 months after the month in which they are credited, applying on a rolling monthly basis. This means that older funds are used first, and employers must actively plan apprenticeship starts to avoid losing funds through expiry.

Where levy funds expire, they are removed from the employer’s account and revert to the wider apprenticeship funding system. Expired funds cannot be reclaimed by the employer, even if the employer continues to pay the levy in later periods. Monitoring account balances and expiry dates is therefore a key compliance and financial planning task for levy-paying employers.

5. What happens if levy funds run out

If an employer’s apprenticeship service account does not contain sufficient funds to cover the full cost of apprenticeship training and assessment, the employer automatically moves onto the co-investment model. Under this arrangement, the government funds 95% of the training and assessment costs, up to the relevant funding band maximum, and the employer is required to pay the remaining 5%.

This transition happens automatically through the apprenticeship service and does not require a separate application. The employer’s obligation to pay apprentice wages and meet all other employment-related costs remains unchanged.

6. Choosing training providers and managing payments

Employers must select training providers from the Register of Apprenticeship Training Providers and must have a contract in place with their chosen provider. This contract should set out how training will be delivered, how payments will be managed through the apprenticeship service and how compliance with funding rules will be ensured.

Payments for training and assessment are made monthly from the employer’s apprenticeship service account directly to the training provider, based on the agreed price and subject to the funding band maximum. Employers remain responsible for ensuring that training is delivered in line with the approved apprenticeship standard and that apprentices are given sufficient time and support to complete their programme.

7. Section D summary

Apprenticeship levy funds are held in an employer’s apprenticeship service account and can only be used for approved apprenticeship training and end-point assessment. Funds are credited monthly, attract a 10% government top-up for England-based employees and expire after 24 months on a rolling monthly basis. Employers must actively manage their accounts, select approved providers and ensure compliance with funding rules to avoid losing funds or facing recovery action.

Section E: Apprenticeship Levy Transfers

In addition to using levy funds to train their own apprentices, levy-paying employers have the option to transfer a proportion of their unused levy funds to other employers. Levy transfers are intended to widen participation in apprenticeships, particularly among smaller employers and charities, while enabling levy-paying employers to reduce the risk of funds expiring unused.

1. The 25% levy transfer limit

Levy-paying employers can transfer up to 25% of the value of their annual apprenticeship levy contributions to other employers. This limit is calculated by reference to the employer’s total annual levy liability, rather than the balance held in their apprenticeship service account at any given time.

Transfers must be made through the apprenticeship service and are subject to the apprenticeship funding rules. Once funds are transferred, they are committed to the receiving employer and cannot be reclaimed or reallocated by the transferring employer.

2. Who can receive levy transfers

Levy transfers can be made to any employer with an apprenticeship service account, including non-levy-paying employers, charities and public sector organisations. There is no requirement for a corporate connection between the transferring and receiving employer, although transfers are commonly used within supply chains, partnerships or local business networks.

The receiving employer remains the legal employer of the apprentice and is responsible for all employment law obligations, including pay, working time, health and safety and compliance with right to work requirements. The transferring employer does not employ the apprentice and does not assume employment or training liabilities.

3. Strategic use of levy transfers

Many levy-paying employers use levy transfers as part of a broader workforce development or corporate social responsibility strategy. Transfers can support skills development within supply chains, strengthen commercial relationships and contribute to local or sector-based training initiatives.

From a financial perspective, levy transfers also allow employers to make productive use of funds that might otherwise expire, particularly where internal apprenticeship demand is limited or does not align with the timing of levy fund expiry.

4. Compliance boundaries and funding controls

Although levy transfers provide flexibility, they are subject to strict funding controls. Transferred funds can only be used to pay for apprenticeship training and end-point assessment that complies with the apprenticeship funding rules and relates to an approved apprenticeship standard.

The Education and Skills Funding Agency retains oversight of transferred funds and may audit both the transferring and receiving employers. Where funding rules are breached, the agency may recover funds and restrict access to future apprenticeship funding. Employers should therefore carry out appropriate due diligence before agreeing to transfer levy funds.

5. Managing transfers through the apprenticeship service

All levy transfers are administered through the apprenticeship service. The transferring employer selects the receiving employer, sets the value of the transfer and approves the use of funds for specific apprenticeship standards. Once approved, payments are made automatically to the training provider from the transferring employer’s levy funds.

The apprenticeship service provides visibility over committed transfers and remaining transfer capacity, allowing employers to monitor their exposure and ensure that transfers remain within the permitted limits.

6. Section E summary

Levy transfers allow levy-paying employers to transfer up to 25% of their annual levy contributions to other employers to support apprenticeship training. Transfers can be used strategically to support supply chains, local businesses and wider skills development while reducing the risk of levy funds expiring unused. However, transfers are tightly regulated, and employers must ensure full compliance with the apprenticeship funding rules to avoid recovery action or funding restrictions.

Section F: Apprenticeship Funding for Non-Levy Employers

Employers that do not pay the apprenticeship levy can still access substantial government funding to support apprenticeship training. The non-levy funding system is designed to ensure that smaller employers and organisations with lower payroll costs are not excluded from the apprenticeship programme and can invest in skills development without bearing the full cost of training.

1. Who qualifies as a non-levy employer

An employer is classed as a non-levy employer where its annual pay bill is below £3 million and it is not connected to other employers whose combined payroll exceeds the levy threshold. This assessment is based on total earnings subject to Class 1 secondary National Insurance contributions and applies regardless of sector or organisational form.

Non-levy employers do not pay the 0.5% apprenticeship levy through PAYE, but they can still access government funding for apprenticeship training and assessment through co-investment arrangements or through levy fund transfers from levy-paying employers.

2. Government funding and the co-investment model

Under the co-investment model, the government pays 95% of the cost of apprenticeship training and end-point assessment, up to the maximum funding band for the relevant apprenticeship standard. The non-levy employer is required to contribute the remaining 5% of the training and assessment costs.

The employer’s contribution is paid directly to the training provider, while the government’s share is paid through the apprenticeship service. This funding model enables non-levy employers to access high-quality apprenticeship training at a significantly reduced cost, while retaining a financial stake in the programme.

3. 100% funding for small employers hiring young apprentices

Enhanced funding support is available to small non-levy employers. Where an employer has fewer than 50 employees, the government will fund 100% of the apprenticeship training and assessment costs, up to the relevant funding band maximum, provided the apprentice is aged between 16 and 21 at the start of their apprenticeship.

The same 100% funding applies where the apprentice is aged 19 to 24 at the start of their apprenticeship and has an education, health and care plan, or has previously been in the care of their local authority. In these circumstances, the employer is not required to make the 5% co-investment contribution.

Employers benefiting from 100% funding must still meet all other apprenticeship and employment law requirements, including paying wages, providing off-the-job training and complying with health and safety and working time obligations.

4. Reserving funds through the apprenticeship service

Non-levy employers access government funding for apprenticeships by reserving funds through the apprenticeship service before an apprenticeship starts. Reservations allow employers to secure funding in advance and provide certainty that government support will be available once the apprentice begins training.

Reservations are generally valid for a limited period, typically up to three months, although the government may pause or adjust reservation arrangements during the financial year to manage programme affordability. If a reservation expires before an apprenticeship start is confirmed, the employer must make a new reservation, subject to funding availability.

Once an apprenticeship has started, funding is paid directly to the training provider through the apprenticeship service, with the employer’s contribution, where applicable, paid separately.

5. Levy fund transfers and non-levy employers

Non-levy employers may also fund apprenticeships through levy fund transfers from levy-paying employers. Where an apprenticeship is fully funded through a levy transfer, the non-levy employer is not required to make a co-investment contribution, as the training and assessment costs are covered by the transferring employer’s levy funds.

This route can be particularly beneficial for small employers, charities and voluntary organisations that may otherwise struggle to meet even the reduced co-investment costs. However, access to levy transfers depends on the availability of funds and the willingness of levy-paying employers to support other organisations.

6. Additional payments and incentives

In addition to training funding, non-levy employers may be eligible for incentive payments. These include a £1,000 payment for hiring apprentices aged 16 to 18, or aged 19 to 24 with an education, health and care plan or a care background. These payments are intended to help employers meet the additional costs associated with supporting young apprentices, such as supervision, mentoring and equipment.

Incentive payments are subject to eligibility criteria and are typically paid in instalments once the apprentice has remained in learning for a specified period.

7. Section F summary

Non-levy employers can access substantial government funding to support apprenticeship training through co-investment arrangements, enhanced support for small employers and levy fund transfers. While most non-levy employers are required to contribute 5% towards training and assessment costs, small employers with fewer than 50 employees may benefit from 100% government funding when hiring eligible young apprentices. Understanding the available funding routes enables non-levy employers to make informed and affordable use of apprenticeships as part of their workforce development strategy.

Section G: Legal Duties When Hiring Apprentices

While apprenticeship funding is governed by detailed rules, employers must also ensure that apprentices are engaged in full compliance with UK employment law. Apprentices are employees, and the fact that their training is supported by government funding does not reduce or replace an employer’s legal responsibilities. Failure to meet these obligations can expose employers to employment tribunal claims, funding recovery action and reputational risk.

1. Apprentices as employees under UK law

An apprentice engaged under an approved apprenticeship standard is an employee for the purposes of UK employment law. This means apprentices are entitled to the same core statutory rights and protections as other employees, subject to the usual qualifying periods and age-related provisions.

These rights include entitlement to the National Minimum Wage or National Living Wage, statutory paid holiday, rest breaks, protection from unlawful discrimination and, where eligibility criteria are met, statutory sick pay, maternity or paternity leave and protection from unfair dismissal. Employers cannot use apprenticeship funding to offset wage costs, and wages must be paid irrespective of whether levy or government funding is available.

Employers must also comply with wider workplace obligations when employing apprentices, including health and safety duties, working time limits and right to work checks.

2. Contracts of employment and apprenticeship agreements

Employers are required to provide apprentices with a contract of employment setting out the terms and conditions of their role, including pay, hours of work and notice provisions. In addition to the employment contract, an apprenticeship agreement must be in place at the start of the apprenticeship.

The apprenticeship agreement is a statutory document that confirms the apprentice is undertaking a recognised apprenticeship under an approved standard and sets out the framework for training. It must comply with legislative requirements to ensure the apprenticeship is legally valid and eligible for funding.

Alongside the apprenticeship agreement, the employer, apprentice and training provider must also sign a commitment statement. This document sets out how the apprenticeship will be delivered, the responsibilities of each party and how progress will be monitored throughout the training period. All parties are expected to work in accordance with the commitments set out in this statement.

3. Working time and off-the-job training

Employers must ensure that apprentices receive at least 20% of their normal working hours as off-the-job training. This training must be directly relevant to the apprenticeship standard and must take place during paid working time.

Off-the-job training can include formal teaching, online learning, mentoring and practical training activities, provided these meet the requirements of the apprenticeship funding rules. Failure to provide the required level of off-the-job training can result in funding being withdrawn or recovered and may prevent the apprentice from completing their programme successfully.

4. Managing performance, conduct and dismissal

Apprentices are subject to the employer’s usual performance management, disciplinary and grievance procedures. Employers may address issues relating to conduct, capability or attendance in the same way as for other employees, provided procedures are applied fairly and consistently.

Most modern apprentices are engaged under approved apprenticeship standards rather than traditional common-law apprenticeship contracts, which are now relatively rare. Nevertheless, employers should be aware that terminating an apprenticeship early can have additional consequences beyond those associated with dismissing an ordinary employee. Early termination may result in the loss of funding and, in some cases, repayment of funds already drawn down.

Employers should therefore approach performance management and dismissal decisions involving apprentices with care and ensure that appropriate procedures are followed.

5. Funding audits and enforcement risk

Employers using apprenticeship funding are subject to oversight by the Education and Skills Funding Agency. Audits may be carried out to verify apprentice eligibility, confirm compliance with funding rules and ensure that training requirements are being met.

Where non-compliance is identified, the funding agency may recover funds, suspend payments or restrict access to future apprenticeship funding. In serious cases, employers may also face scrutiny from HMRC or other regulators.

To manage these risks, employers should maintain accurate records of employment contracts, apprenticeship agreements, commitment statements and evidence of training delivery, and ensure that internal processes support compliance with both employment law and apprenticeship funding rules.

6. Section G summary

Hiring an apprentice creates the same core employment law obligations as hiring any other employee, alongside additional requirements linked to apprenticeship funding. Employers must ensure that apprentices are properly employed, paid and supported, that statutory documentation is in place and that training requirements are met. Effective compliance reduces legal risk, protects access to funding and supports successful apprenticeship outcomes.

Section H: Using Apprenticeships for Workforce Planning and Skills Strategy

Apprenticeships are increasingly used by employers as a strategic workforce planning tool rather than solely as a recruitment mechanism. When aligned with business objectives, apprenticeship programmes can support long-term skills development, improve workforce resilience and reduce reliance on external recruitment in competitive labour markets.

1. Addressing skills shortages and future capability

Many UK employers face persistent skills shortages, particularly in technical, digital, healthcare and professional services roles. Apprenticeships allow employers to develop skills internally by training individuals to meet specific occupational standards that reflect real-world job requirements.

By designing apprenticeship pathways aligned with current and anticipated skills needs, employers can build future capability within their organisation. This approach enables employers to respond more effectively to technological change, regulatory developments and evolving customer demands, while reducing exposure to external skills shortages.

2. Recruiting new talent through apprenticeships

For employers seeking to attract new talent, apprenticeships provide access to a diverse pool of candidates who may not follow traditional academic routes. Apprenticeships can support social mobility and widen participation by offering paid employment combined with structured training and recognised qualifications.

Employers that integrate apprenticeships into their recruitment strategies can develop entry-level talent tailored to their organisation’s culture and processes. This can lead to stronger engagement and loyalty, as apprentices often develop a long-term connection to the employer that invests in their training and development.

3. Upskilling and reskilling existing employees

Apprenticeships are not limited to new recruits. Levy and non-levy employers alike can use apprenticeship funding to upskill or reskill existing employees, provided the apprenticeship represents a substantive new role or skillset and meets the requirements of an approved standard.

This can be particularly valuable where employers need to adapt to new technologies, regulatory frameworks or changing business models. By supporting internal progression through apprenticeships, employers can retain experienced staff, preserve organisational knowledge and create clear development pathways that enhance employee engagement.

4. Retention, progression and workforce stability

Employers that invest in apprenticeships often see positive effects on retention and workforce stability. Structured training, clear progression routes and recognised qualifications can improve job satisfaction and encourage employees to remain with the organisation.

Apprenticeships can also support succession planning by developing future supervisors, managers and specialists from within the workforce. This reduces dependency on external recruitment for senior roles and helps maintain continuity within the organisation.

5. Integrating apprenticeships into broader HR and business planning

To maximise their impact, apprenticeships should be integrated into broader HR, learning and development and business planning strategies. This includes aligning apprenticeship programmes with performance management, diversity and inclusion objectives and long-term workforce forecasts.

For levy-paying employers, strategic planning is also essential to ensure that levy funds are used effectively before they expire. This may involve coordinating apprenticeship starts across departments, using levy transfers where appropriate and monitoring account balances and rolling expiry dates.

6. Section H summary

When used strategically, apprenticeships can support recruitment, skills development, retention and long-term workforce planning. Employers that align apprenticeship programmes with business objectives and skills needs can create a sustainable talent pipeline while making effective use of available funding, whether through the levy or government support.

Apprenticeship Levy FAQs

What is the apprenticeship levy?

The apprenticeship levy is a statutory payroll charge introduced by the UK government to fund apprenticeship training and assessment. Employers with an annual pay bill of more than £3 million are required to pay 0.5% of their payroll through PAYE. Levy funds are credited to a digital apprenticeship service account and can be used to pay for approved apprenticeship training and end-point assessment in accordance with the funding rules.

Who is required to pay the apprenticeship levy?

Employers operating in the UK with an annual pay bill exceeding £3 million must pay the apprenticeship levy. This includes groups of connected companies or charities whose combined payroll exceeds the threshold, even where individual entities fall below it. Employers below the threshold are not required to pay the levy but may still access government funding for apprenticeships.

How is the apprenticeship levy calculated?

The levy is calculated as 0.5% of an employer’s total pay bill that is subject to Class 1 secondary National Insurance contributions. Employers can offset an annual levy allowance of £15,000 against their liability, which effectively sets the levy threshold at £3 million. Levy payments are calculated and reported monthly using actual payroll data through PAYE.

What can apprenticeship levy funds be used for?

Levy funds can only be used to pay for apprenticeship training and end-point assessment delivered by approved providers and assessment organisations. Funds cannot be used to cover wages, recruitment costs, travel expenses, equipment or general business overheads. All spending must comply with the apprenticeship funding rules.

Can apprenticeship levy funds be used for existing employees?

Yes. Levy funds can be used to train existing employees, provided the apprenticeship represents a substantive new role or skillset and meets the requirements of an approved apprenticeship standard. This includes higher and degree apprenticeships, even where the employee already holds academic qualifications.

What happens if apprenticeship levy funds are not used?

Levy funds expire 24 months after the month in which they enter the employer’s apprenticeship service account, applying on a rolling monthly basis. Expired funds are removed from the account and revert to the wider apprenticeship funding system. Employers cannot reclaim expired funds.

Can employers transfer apprenticeship levy funds to other organisations?

Levy-paying employers can transfer up to 25% of the value of their annual levy contributions to other employers through the apprenticeship service. Transfers are commonly used to support apprenticeships within supply chains, charities or local business networks.

What happens if an employer’s levy funds run out?

If an employer’s apprenticeship service account does not contain sufficient funds to cover training and assessment costs, the employer automatically moves onto the co-investment model. Under this model, the government pays 95% of the training costs up to the funding band maximum, and the employer pays the remaining 5%.

Do non-levy employers have to contribute to apprenticeship training costs?

Most non-levy employers are required to contribute 5% of the apprenticeship training and assessment costs, with the government funding the remaining 95%. Small employers with fewer than 50 employees may be eligible for 100% funding when hiring eligible young apprentices.

Are apprentices entitled to employment rights?

Yes. Apprentices are employees and are entitled to statutory employment rights, including the National Minimum Wage, paid holiday, rest breaks and protection from discrimination. Employers must also comply with health and safety, working time and right to work requirements.

What happens if an apprentice leaves early?

If an apprenticeship ends early, funding will usually stop at that point. Depending on the circumstances, employers may be required to repay some funding. Early termination can also affect workforce planning and funding compliance, so employers should manage such situations carefully.

Are there compliance risks associated with apprenticeship funding?

Yes. Employers using apprenticeship funding may be subject to audits by the Education and Skills Funding Agency. Where funding rules are breached, funds may be recovered and access to future funding restricted. Maintaining accurate records and ensuring compliance with both employment law and funding rules is essential.

Is the apprenticeship levy expected to change in 2026?

While the core structure of the apprenticeship levy remains in place, funding rules and incentives are reviewed regularly. Employers should monitor government announcements and updated funding guidance to ensure ongoing compliance and to take advantage of any changes to the system.

Conclusion

The apprenticeship levy has fundamentally reshaped how skills development is funded and delivered in the UK, placing employers at the centre of decisions about training, workforce capability and long-term talent investment. For levy-paying employers, it represents both a statutory payroll cost and a significant opportunity to invest in structured, high-quality training aligned to business needs. For non-levy employers, government funding and co-investment arrangements ensure that apprenticeships remain accessible and affordable.

To make effective use of the apprenticeship levy system, employers must understand when levy liability arises, how the levy is calculated and reported through PAYE, and how funds can be accessed, managed and spent in compliance with the apprenticeship funding rules. This includes careful monitoring of levy accounts, awareness of rolling fund expiry dates and strategic consideration of levy transfers where appropriate.

Employers must also recognise that apprentices are employees with full statutory employment rights. Compliance with employment law obligations, alongside adherence to funding rules and documentation requirements, is essential to managing legal and financial risk. Failure to do so can result in funding recovery, regulatory scrutiny and reputational damage.

When approached strategically, apprenticeships can support recruitment, address skills shortages, improve retention and strengthen long-term workforce planning. By aligning apprenticeship programmes with organisational objectives and skills requirements, employers can create a sustainable talent pipeline while maximising the value of available levy and government funding. Whether paying the levy or accessing support as a non-levy employer, a well-informed and compliant approach to apprenticeships can deliver lasting benefits for both the organisation and its workforce.

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