The number of apprenticeships undertaken at small and medium enterprises (SMEs) could drop by 75,000 without reform to the levy, the Learning and Work Institute has warned. 

New data from the Institute has found that large employers are using more of their levy funds than forecast, with the amount left for SMEs being only half as much as expected. 

Current trends suggest that the levy could be overspent by £1 billion in the next year – despite apprenticeship starts falling by a fifth since the introduction of the levy.

Background: Apprenticeships: providers face cash shortage for SMEs

More: Apprenticeship levy needs reform, UCU urges

Opinion: 'The apprenticeship levy is set to run out. Changes are needed'

Three in four (74 per cent) apprenticeship providers working with SMEs told a recent survey by the Association of Employment and Learning Providers (AELP) that the level of funding was insufficient to meet demand – and that many have been forced to reduce or cease recruitment as a result. 

The Learning and Work Institute report states that the overspend has been driven by two factors: a growth in higher and degree-level apprenticeships, and the new rigorous apprenticeship standards, which are more expensive than expected. 

As a result of these findings, the Institute has called for urgent action to prevent imminent overspend and ensure funding is available for SMEs and young people. They have three recommendations for the government: 

• Invest an additional £150 million per year for apprenticeships at SMEs.
• Fund apprenticeships for 16- to 18-year-olds from the education budget, rather than the apprenticeship levy, requiring an additional £400m per year.
• Require employers or individuals to provide top-up funding for higher and degree level apprenticeships for workers aged 25 and over. This would require employers to provide 50 per cent of the cost of apprenticeships at level 4 and 5, and 75 per cent of apprenticeships at level 6 and 7 for this age group, from outside of their levy funds. This would reduce levy spending by around £318m per year.

Stephen Evans, chief executive of Learning and Work Institute, said that while the government was right to introduce the levy, there was a risk of missing the target and busting the budget. 

"Ignoring this problem is not an option. It would just lead to a creeping rationing of apprenticeships at the small employers that make up the backbone of our economy, and it would limit opportunities for young people.

"Our balanced approach would plug the funding gap, and it would support employers to train young workers and upskill adults with lower levels of qualifications. Beyond this, we need to look at how to ensure the levy can deliver our long-term skills needs," he said.

Mark Dawe, AELP chief executive, said: "The prime minister said in July that apprenticeships would be 'properly funded' and the Budget on 6 November will determine whether or not that was just another politician's empty promise.

"Businesses and young people across the country, especially in areas north of the M25, are extremely frustrated that they are being denied the funding for new places on the programme and so government needs to back up its apprenticeship reforms with a budget which is sustainable over the long term," he said. 

David Hughes, chief executive at the Association of Colleges, said: “The apprenticeship levy has successfully engaged many large businesses in the programme for the first time, but the higher costs are resulting in young people and SMEs missing out.

“That has to change if the productivity and social justice aims of the programme are to be achieved. This timely report should be carefully considered by the government before the budget when the chancellor will need to put the programme back on track.”