OBR forecast hikes apprenticeship levy intake to £4bn next year

Cash raised by the apprenticeship levy is set to dramatically surpass previous predictions and hit £4 billion by 2024-25, new forecasts from the government’s spending watchdog have revealed.

It means the gap between employer receipts generated from the levy and what is distributed for public spending on apprenticeship training will grow even wider, with one expert labelling the disparity as a “gaping chasm”.

The Office for Budget Responsibility (OBR) published its annual “economic and fiscal outlook” this week after the chancellor delivered his autumn statement. It now predicts that apprenticeship levy receipts will reach £3.9 billion in 2023-24, which is £300 million more than was forecast at this point last year.

Economists in the independent government agency, funded by the Treasury, predict that receipts will then hit £4 billion the following year, which is again £300 million higher than first estimated.

At that point, the Department for Education’s set budget to spend on apprenticeships in England will be just £2.7 billion, while the devolved administrations will receive around £500 million. It means the Treasury will be withholding around £800 million worth of cash generated from the apprenticeship levy in 2024-25.

The £2.7 billion budget was set at the spending review in 2021, which decided spending plans for the next three years to the end of 2024-25. A Treasury spokesperson told FE Week the department “does not tend to adjust the budget even if levy receipts rise or fall over the spending review period”.

The figures come weeks after FE Week revealed how the Treasury was accused of using the apprenticeship levy as a cash cow and was short-changing employers who contribute to the tax.

Simon Ashworth, director of policy at the Association of Employment and Learning Providers, said the OBR’s new figures show how the “growing gap between apprenticeship levy receipts and the apprenticeship budget is quickly becoming a gaping chasm”.

He added: “The rise in the expected levy receipts is no small fry, and once again increases the surplus between the levy take and the overall levy budget. According to OBR forecasts, this gap will get bigger and bigger in future years and is starting to look more like a windfall tax on employers, rather than a mechanism to invest in vitally needed skills training.”

Uplifting DfE budget ‘politically difficult’

Since 2017, UK businesses with a payroll of £3 million or more pay 0.5 per cent of their annual pay bill into a levy pot which is used to fund apprenticeships for both large and small businesses.

The Treasury then decides on a ring-fenced budget to give the Department for Education enough to spend on apprenticeships in England. The devolved governments of Scotland, Wales and Northern Ireland receive corresponding allocations via the Barnett formula, although this is not ring-fenced for apprenticeships.

Amounts raised by the levy have grown over time, driven by increases in companies’ pay bills – meaning more pay the tax – due to wage inflation.

Imran Tahir, a research economist from the Institute for Fiscal Studies, said he isn’t aware of any legal mechanism stopping the government from increasing the DfE’s apprenticeship budget after the 2021 spending review in light of the rise in levy receipts, but it would be “politically difficult”.

“If the government announced it was just increasing money for the DfE, then other government departments would complain even if there is this seemingly rational argument that the apprenticeship levy is collecting more, and therefore, the budget should be increased.”

He added that even though the tax is called the “apprenticeship levy”, the money that’s raised “isn’t hypothecated in the sense that it doesn’t determine the apprenticeship budget – this is separately set by the Treasury”, meaning the “name apprenticeship levy is slightly misleading”.

The OBR’s latest forecasts show that the apprenticeship levy will rise to £4.1 billion in 2025-26, £4.3 billion in 2026-27, £4.4 billion in 2027-28, and then £4.6 billion in 2028-29.

Figures for 2021-22 and 2022-23 show that 99.6 per cent and 96 per cent of England’s apprenticeships budget was spent, respectively.

Experts fear there could soon be an overspend amid soaring numbers of higher-level apprenticeships that are most expensive to deliver. FE Week understands there are discussions between Downing Street, the Treasury and the Department for Education about potentially restricting the use of levy funding for level 6 and 7 apprenticeships.

Tahir said there are “very important decisions” to be made by the government at the next spending review across the education budget, “particularly around how they set apprenticeship funding going forward”.

Skills consultant Aidan Relf said: “Politicians are talking up apprenticeships in an almost unprecedented manner but there’s no serious attempt to join the dots in terms of the UK’s woeful track record on productivity or skills shortages. It’s no wonder that the Treasury sees a large top slice of the levy as easy pickings.”

He added that for Labour – which has pledged to widen the apprenticeship levy so that it funds other forms of training, if it wins the next election – the OBR figures “make their ambitions more realisable but other competing priorities mean that hard choices aren’t necessarily avoidable”.