The Apprenticeship Levy Explained

The Apprenticeship Levy can often feel like just another payroll task to juggle. For many employers, it’s a confusing compliance requirement that raises more questions than answers. But what if you could turn it into an advantage? When managed well, the Apprenticeship Levy can become a strategic tool for upskilling your workforce and supporting long-term growth.

Understanding how it works, who pays it and how to report it is the first step. This resource breaks down everything you need to know about the Apprenticeship Levy, alongside a downloadable checklist to help you manage it with confidence.

What is in this checklist?

To make compliance easier, we’ve created a practical checklist to use alongside this guide. It acts as your step-by-step action plan for managing the Apprenticeship Levy accurately every month.

You’ll find everything you need to:

• Calculate your levy contributions.
• Report and pay your liabilities correctly.
• Maintain a clear, repeatable and audit-proof process.

Use it as part of your regular payroll routine to stay compliant and organised. With this tool in hand, you can manage the levy without stress or confusion.

Let’s start by looking at what the Apprenticeship Levy actually is and why it exists.

What is the Apprenticeship Levy?

The Apprenticeship Levy is a UK tax designed to fund apprenticeship training and development. Introduced in 2017, it was created to encourage employers to invest in skills and build a stronger future workforce.

Funds collected through the levy go directly towards approved apprenticeship training and assessment programmes. Larger employers contribute through their payroll, while smaller employers can still access government-backed funding through co-investment.

At its core, the levy isn’t just a tax. It’s an investment in developing talent, reducing skills shortages and improving productivity across the economy.

Who pays the Apprenticeship Levy?

You must pay the Apprenticeship Levy if your annual pay bill exceeds £3 million. Your pay bill includes all employee earnings subject to Class 1 secondary National Insurance contributions (NICs), such as wages, bonuses and commissions.

If you operate multiple payrolls or belong to a group of connected companies, you’ll need to add all pay bills together. If the total exceeds £3 million, you’ll pay the levy. A single £15,000 allowance is shared between connected companies.

Even if your business doesn’t meet the threshold, it’s worth understanding how the levy works, as you can still access apprenticeship funding through co-investment.

How does the Apprenticeship Levy work?

Once you’ve determined you’re a levy-paying employer, the process is managed through your standard PAYE system. Each month, you calculate your levy liability, report it to HMRC and pay it alongside your income tax and National Insurance contributions.

The mechanics rely on getting the numbers right each month, which starts with a clear calculation.

Each month, you’ll:

1. Calculate your levy liability.
2. Report it to HMRC.
3. Pay it alongside your income tax and National Insurance contributions.

Your contributions are then credited to a digital Apprenticeship Service account, which you can use to pay for training and assessments. Only approved training providers can deliver courses funded by your levy.

Funds in your digital account expire after 24 months, so it’s important to plan how you’ll use them. You can also transfer up to 25% of your annual levy funds to other businesses, supporting apprenticeships across your supply chain or community.

How to calculate Apprenticeship Levy

The calculation itself is straightforward. The levy is charged at 0.5% of your total annual pay bill. However, you also get an annual levy allowance of £15,000 to offset against what you owe. This allowance is divided evenly across the months, giving you £1,250 to use each month.

Here’s how it works in practice:

1. Calculate your total monthly pay bill (all earnings subject to Class 1 secondary NICs).
2. Calculate 0.5% of this monthly figure.
3. Subtract the monthly allowance of £1,250.
4. The remaining amount is what you owe for the Apprenticeship Levy that month.

For example, if your monthly pay bill is £300,000, your levy due would be (£300,000 x 0.5%) – £1,250 = £250 for that month. You report this figure to HMRC through your Employer Payment Summary (EPS) as part of your payroll submission. A clear grasp of payroll processes is essential here and our payroll guide offers a great foundation.

While the rules apply to employers over the threshold, many wonder if specific exemptions exist.

What is an Apprenticeship Levy exemption?

There are no true exemptions from the Apprenticeship Levy itself. If your annual pay bill is over £3 million, you are required to pay it. The term “exemption” is more commonly used to refer to employers who fall below this threshold and therefore do not have to pay the levy.

If your pay bill is under £3 million, you don’t pay the levy. However, you can still access funding for apprenticeships through a system called “co-investment,” where the government pays for 95% of the training costs and you pay the remaining 5%. It’s also important to note that apprenticeship funding rules differ slightly between England, Scotland, Wales and Northern Ireland, so be sure to check the specific guidance for your location.

A key part of reporting your liabilities to HMRC, including the levy, is the P32 report.

What is a P32 report?

The P32 Employer Payment Record is a report generated by your payroll software each month (or quarter). It summarises your total PAYE liabilities due to be paid to HMRC for that period. This report is your central source of truth for payments.

It breaks down everything you owe, including:

• Employee income tax (PAYE).
• Employee and employer National Insurance contributions.
• Student loan deductions.
• And, if applicable, your Apprenticeship Levy payment.

The P32 shows you the final, consolidated amount to pay to HMRC after accounting for any reductions, like statutory payments you’ve reclaimed. Reviewing it each month is a critical step in ensuring your payroll—and your levy payments—are accurate. Managing this alongside other payroll duties, like the end of employment payroll process, demands precision.

Manually tracking all these moving parts is a recipe for error and wasted time. This is where automation can transform your workflow.

How can Employment Hero help?

Stop letting payroll compliance slow you down. The Apprenticeship Levy adds another layer of complexity to an already demanding process, but it doesn’t have to be a struggle. The right tools can eliminate the administrative burden entirely.

Employment Hero’s payroll software automates the entire process for you. Our system automatically calculates your levy liability based on your pay bill, includes the correct figures in your HMRC submissions and provides a clear view of your liabilities on your P32 report. It removes the risk of human error and gives you back the time to focus on what matters: building a talented team. Don’t just manage payroll; master it.