Rachel Reeves’ tweaks to the apprenticeship levy funding system will “squeeze” large employers and risks “dampening appetite” for skills investment, business groups and experts have warned.
The chancellor’s budget announced £725 million over the rest of this Parliament to be injected into the apprenticeship system, which will be reformed into a “growth and skills levy” from April.
Some of the additional cash will fully fund apprenticeships for under-25s in small and medium-sized businesses, but most of the rest will ease pressure on England’s strained apprenticeship budget which was overspent for the first time last year.
Reeves’ budget red book also revealed the government will remove a 10 per cent uplift for levy payers, halve the time levy payers have to use their levy funds from 24 to 12 months, and slash the co-investment rate offered to big businesses when they exhaust their funds to 75 per cent.
Robert West, head of education and skills at the Confederation of British Industry, said there was “some concern” as the trio of changes for levy payers will “all put increased pressure on levy resources”.
“Overall, this could mean lower government topping-up and faster recycling of unused funds back to the Treasury – all of which would reduce the overall pool available for training,” he told FE Week.
Tom Richmond, an education policy analyst and former adviser to education ministers, said: “While pushing more money towards apprenticeships for young people will rightly steal the spotlight, some of the other changes look like a subtle way to put the squeeze on larger employers by reducing any cash piles sitting in their levy accounts.”
He described the 10 per cent uplift for levy payers as a “weird feature” of the funding system that is “not worth mourning”. But “quietly reducing the co-investment rate to 75 per cent after a levy payer’s account has run dry looks like an attempt to stop larger employers hoovering up too much funding, while reducing the expiry window will heap more pressure on levy payers to get spending their contributions as quickly as possible – presumably in an attempt to prop up apprenticeship starts”.
It is not clear when the government will introduce the modifications. The Treasury told FE Week that work and pensions secretary Pat McFadden would engage with businesses from December, and officials will set out further details “in due course”.
Dampening appetite risk
Since the apprenticeship levy was introduced in 2017, only large employers with a payroll in excess of £3 million have paid into the levy at a rate of 0.5 per cent of salary costs.
The 10 per cent top-up has been a feature since the levy launched. It meant that if an employer paid £1 million into the levy they would have £1.1 million to spend on apprenticeship training.
Currently, employers’ levy funds are removed from their digital accounts if they’re not spent within 24 months. This “use it or lose it” feature was designed to encourage levy-paying employers to invest in high-quality training and assessment and to prevent them from accruing overly large balances.
The co-investment rate for levy payers if they spend all of their funds is understood to be 95 per cent currently.
Dale Walker, director of education at apprenticeships provider Apprentify, said the restrictions announced by Reeves could “dampen” the appetite for apprenticeships.
He told FE Week: “A 12-month spending window is extremely tight when deploying levy funds with many large employers already taking more than a year to implement apprenticeship programmes.
“Separately, increasing the employer contribution to 25 per cent [for the co-investment rate] and removing the 10 per cent top-up risks dampening appetite among levy-paying organisations already dealing with rising hiring, pension and tax costs.
“My sense is that these changes may simply lead to more levy gifting and more unspent levy overall, rather than increasing meaningful investment in apprenticeships.”
Hannah Larsen, policy officer at the British Chamber of Commerce, was particularly “disappointed that government is increasing costs for the trailblazing employers who exhaust their levy funds”.
Growth and skills levy reform
England’s apprenticeships budget was fully spent in recent years and the government plans to ease pressure by removing level 7 apprenticeships for people aged 22 and older from January.
There will however be a short-term strain caused by a spike in level 7 starts, which are the most expensive to deliver, as employers rush to use the training route while they still can.
The reformed growth and skills levy will also fund non-apprenticeship training from April.
New apprenticeship “units” will be on offer, which could be courses as short as one week and are likely to be qualifications that exist within apprenticeship standards.
The levy is generating more cash contributions than expected and is now estimated to raise £4.4 billion this year.
England’s apprenticeship budget for 2025-26 is set at £3.075 billion, while the devolved nations receive just over £500 million. It means the top slice the Treasury takes between how much the levy generates and how much is dished out for apprenticeship spending hits around £820 million.
Forecasts for 2026-27 show the levy intake will rise to £4.6 billion. If the Treasury fails to increase apprenticeship spending budgets the Treasury margin will hit £1 billion.
The Office for Budget Responsibility expects the levy to raise £5 billion for the first time by 2029-30.
Stephen Evans, chief executive of the Learning and Work Institute, said: “Extra funding for apprenticeships is welcome, though largely reflects an expected rise in the amount the levy raises meaning the Treasury will still be keeping a substantial sum.
“At the same time, measures such as shortening the expiry time for levy funding are likely to reduce the amount of their levy that large firms spend, helping to tackle any pressures on the overall budget and pay for ending training costs for young apprentices in SMEs.”
Ben Rowland, CEO of the Association of Employment and Learning Providers, said the changes in this week’s budget “will feel like a squeeze for levy payers”.
“Removing the 10 per cent top-up, shortening levy expiry to 12 months and tightening co-investment will inevitably drive different behaviours, and employers will now be even keener to see what they get back through the apprenticeship unit offer from April,” he added.
“The move to fully fund under-25s for non-levy employers is positive and will strip out needless admin, but it also raises questions about how adults over 25 may be funded in future, particularly outside priority sectors.”
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