Even trebling the number of business in scope for the apprenticeship levy would not raise sufficient funding to support SMEs to recruit apprenticeships, new research has shown.

Analysis by education consultancy Public First for the Association of Employment and Learning Providers (AELP), using ONS data and OBR levy revenue figures, shows that a dramatic reduction of the payroll threshold from £3 million to £1 million would generate £400 million in extra revenue, although it would mean nearly 60,000 more employers would be paying the levy. 

This compares to a current levy pot of around £2.8 billion, according to National Audit Office forecasting, which it is expected will all be spent and exceeded. According to the AELP, non-levy paying SMEs were accounting for over £1 billion of the annual apprenticeship budget before the levy’s introduction. The AELP claims that even an additional £400 million would not be sufficient to meet SME demand.

Earlier this year, an AELP survey showed more than a third of apprenticeship training providers with a non-levy government contract has stopped or significantly reduced the recruitment of apprentices for smaller employers due to a shortfall in funding.

Background: Providers cut apprenticeships due to lack of funding

News: Where apprenticeships are growing – and shrinking

More: Leave levy alone, employers urge government 

Funding system for non-levy payers

The AELP said the consultancy’s findings strengthened the case that while the government was probably right to decide on a minimum £3 million annual payroll threshold for the levy’s scope originally, the chancellor should use his forthcoming Budget to announce a separate apprenticeship funding system for non-levy paying employers.

Lowering the threshold for paying the levy would likely not be welcomed by many smaller businesses, the AELP acknowledged, when many of them were already dealing with an uncertain economic outlook and other cost pressures.  Meanwhile, increasing the levy rate on existing levy payers to raise more money for the programme budget would unlikely to be an option the government would consider.

Instead the chancellor should bring back a standalone £1.5 billion annual budget to fund the demand for apprenticeships from non-levy SME employers. This would preserve the principle of employer choice for businesses of all sizes in deciding what type and level of apprenticeship they wanted for their employees, said AELP.

AELP chief executive Mark Dawe said: “We’ve been told that the March budget will be a budget for skills and the immigration controls announcement has stressed the need for more SMEs to be able to recruit apprentices across the country. The levy works extremely well for levy payers but this latest analysis shows why a separate funding solution is required for smaller employers so that key sectors can meet their staffing challenges.” 

Anthony Impey, apprenticeships and skills policy chair at Federation of Small Businesses (FSB), said: “FSB’s own research has found nine out of 10 apprenticeships offered by small companies are filled by 16- to 24-year-olds.  Small businesses that engage with the apprenticeship system love it because they see a huge return on their investment and so at a critical time for the country’s economic future, now is the time for the government to show serious support with greater investment in the skills development of more home grown talent.”

John Cope, deputy director of Public First, said: “The apprenticeship levy has become financially unsustainable, meaning reform is inevitable. Smaller firms don't currently pay the levy, but asking them to do so has been floated by policymakers. Public First analysis found lowering the threshold would quickly lead to a dramatic increase in the number of levy payers but for a relatively small gain in tax revenue.  Lowering the levy threshold alone is unlikely to address the financial pressure on the system. The government therefore will need to consider other ways to get cash into the system, or impose restrictions on what the levy can be spent on.”