Manufacturing SMEs are being squeezed out of apprenticeships

There is no denying that the skills challenges facing the government are stark. Today, the UK has close to one million young people aged 16-24 not in education, employment or training (NEET) and in two of the country’s biggest sectors – manufacturing and engineering – apprenticeship starts are well below the level they reached in the early and mid-2010s, with over 500,000 starts a decade ago compared with 340,000 starts in 2023-24.

Apprenticeships are essential for building our future workforce, improving productivity and creating accessible vocational routes into high-demand sectors. Yet, the route for young people to access these industries is lagging. Not only does this jeopardise the potential of these future workers, but it also undermines the UK’s global competitiveness.

This picture is particularly acute for SMEs (small and medium sized businesses). In our latest ‘SME snapshot’ survey, we found that labour and skills shortages are negatively impacting their businesses. Sixty per cent of businesses have engaged in recruitment over the last six months, and of those, 80 per cent said they experienced difficulties getting suitable staff, with 60 per cent citing lack of candidates with appropriate technical qualifications as the biggest driver of skills gaps.

If SMEs don’t succeed, the economy doesn’t succeed. Over 90 per cent of UK manufacturing organisations are SMEs: given the manufacturing sector accounts for 9 per cent of UK employment and is a key source of highly skilled and highly paid jobs, it is vital that SMEs can thrive.

For some time now, it has been clear that SMEs fall through the cracks of government policymaking, especially where there is a tendency to focus on policies that work for bigger business. On the apprenticeship system specifically, SMEs can often feel locked out, with its complexity and inflexibility being incredibly challenging to access.  Many directors and managers of manufacturing SMEs are apprentice trained and they know firsthand the value of this route into the sector. If these SMEs feel locked out and priced out of apprenticeship recruitment then we do have a problem.

Employment costs as a barrier to recruitment is well talked about but there is another tax that increasing numbers of SMEs are facing; More SMEs than ever are falling over the apprenticeship levy threshold and becoming levy payers. Using the latest labour market and employer data, we’ve calculated that the average mean salary is now nearly £124 more in manufacturing than this time last year. Consequently, an SME becomes a levy payer with only 68 rather than 70 employees. Going back five years, the wage bill would tip an SME into being a levy payer in the manufacturing sector at 88 employees. This is a 20 person difference in only five years, a monumental and overlooked shift, only compounded by other cost pressures in recent years such as high energy bills and increases to National Insurance. The difference is more stark in manufacturing than in all other sectors combined.

This is a clear example of an unintended policy consequence. SMEs currently pay the levy at well under the 250-person threshold (the formal definition of an SME), resulting in enormous disincentives to engage with the apprenticeship system. This is bad for manufacturing and engineering, and it is bad for young people’s life chances. A simple tweak to public policy here could be all that’s needed to drive real change.

SMEs, with the right support and skills, can be the driving force of the country’s future economic growth.

To achieve this, we’re asking the government to collaborate closely with SMEs on skills reforms and labour market improvements. By co-designing policy, we can ensure that it will genuinely work for SMEs. Enginuity’s Policy Centre for Supply Chain and SMEs was designed to do just this – provide facilitated communication between manufacturing SMEs and government decision makers.
There is a golden opportunity for the government to harness the immense talents within SMEs to drive local and regional economies, creating sustainable and productive employment that can tackle the burgeoning NEETs crisis. Not only that, but we can also turbocharge the uptake of apprenticeships in crucial sectors, fulfilling the government’s ambition of a modern industrial strategy.