Apprenticeship reform is squeezing the very SMEs it needs most

The government’s apprenticeship reforms are being positioned as a deliberate pivot towards young people and SMEs. But when we look more closely a different and worrying picture begins to emerge, and one subgroup risks being squeezed out altogether.

The point at which employers become levy-paying employers – having a pay bill greater than the £3 million threshold – has not changed since 2017. For the 24-25 financial year around 37,000 employers paid the levy, compared to just 22,000 when it was introduced. This is a direct result of fiscal drag and wage inflation, which has significantly extended the ‘tail’ of the levy. This has created a large group of “marginal levy payers” who by their very nature are the same SMEs that the government supposedly wants to enlist to help employ and train more young people. These are employers doing the right thing. They are engaged, investing in skills, and often recruiting young people into the labour market. Yet under the current reforms, they risk becoming the biggest losers.

Positively, there will be a new hire £2,000 cash incentive coming from October 2026 to support small businesses. Originally, the government headline announced this as an incentive for SMEs; however, the detail now says it’s an incentive for non-levy paying employers (typically SMEs). If you are a marginal levy-payer, then sorry, there actually won’t be an incentive for you. Strike one.

Also from August, there will be fully-funded training for new starters aged under 25 in non-levy paying employers. This is a welcome move, removing unnecessary barriers for smaller employers. However, co-investment arrangements for levy payers are conversely shifting from 5 per cent to a sharp 25 per cent surcharge for all age starts from August 2026. That’s all ages, including under 25 – the exact group the government wants to do more for, which is somewhat bizarre. And which employers will feel this quicker and sharper than anyone? Yes, you guessed – it’s the marginal levy payers who spend their fractional levy pot and will flip into the new 25 per cent co-investment model. Strike two.

Historically, levy transfer has been the fiddly mechanism to offset co-investment costs. However, providers tell us that levy-payers have become more cautious in the last 12 months about gifting, primarily as they wait to see the art of the possible with apprenticeship units. In August, the government will cut the 10 per cent top-up levy payers get and cut the expiry period of funds from 24 to 12 months, plus transfers become more costly due to the switch from covering 5 per cent to 25 per cent of the cost. All three of these factors are likely to result in levy payers being even more cautious about gifting levy funds.

From April, apprenticeship units will start for adults aged over 19, and they will be fully funded for both levy payers and generously for non-levy paying employers too.  However, there is a catch. Where levy-payers exhaust their levy funds, then in the period of April to July a 5 per cent co-investment cost appears, which is highly likely to increase to 25 per cent from August. Again, who will be the first segment to feel the burden on this? Yes, you guessed it, marginal levy payers. Strike three.

We are already seeing signs of this in specific sectors. Take dentistry. Most levy-paying dental employers fall into this marginal category. They operate on tight margins and rely heavily on apprenticeships to bring in new talent. Under the proposed changes, employer contributions for a level 3 dental nurse apprentice could rise from around £400 to £2,000. For a level 4 Oral Health Practitioner, from £450 to £2,250. Around 80 per cent of dental nurse apprentices are aged 16-24, many entering directly from school or from NEET (not in education, employment or training) backgrounds. Faced with higher costs, employers may instead recruit already-qualified staff or turn to privately funded qualifications with no off-the-job training requirement.

If marginal levy payers are crowded out, the system loses some of its most committed SMEs, and with them, thousands of opportunities for young people. That would be a high price to pay for reform intended to achieve the opposite effect. As a minimum and in line with wider stated government objectives, there should be no co-investment for 16-24 year olds in both non-levy payers and also when levy payers exceed their levy. This is an ask that AELP will continue to make of the government.