Reform is coming for the apprenticeship levy — but what it needs is a revolution  

Consensus is growing for change in apprenticeships. Marius Ostrowski sets out some bold ideas to reshape employer investment in training

Consensus is growing for change in apprenticeships. Marius Ostrowski sets out some bold ideas to reshape employer investment in training

15 Feb 2024, 5:00

Depending on who wins the next election, the apprenticeship levy may be one of its major casualties – at least in its current form.  

Faced with the government’s rigid efforts to double down on the levy, ideas to overhaul it have been advancing apace.  

These include a flexible skills levy, proposed by the Lifelong Education Institute, designed to cover a wider range of training including short and modular courses, and a plan by Onward for 16–19 apprenticeships to be fully funded by the DfE, at an estimated cost of £1.6bn.  

Labour’s plan is to turn the apprenticeship into a “growth and skills levy”, allowing businesses to use 50 per cent of their contributions on non-apprenticeship training. 

Judging by recent interventions by Tesco and Marks & Spencer, employers are firmly in the mood for change.  

So, if we are plausibly months away from a massive transformation in how we fund a quarter of our vocational learning and training in the UK, we should use this moment to take stock of what the apprenticeship levy – or its successor – is trying to achieve. 

Fundamentally, the levy works as a redistribution mechanism within the relatively closed system of the UK business community.  

It redistributes a small share of the profits of the 2 per cent of businesses eligible to pay it – those with over £3m in payroll – to make more money available for smaller businesses to invest in human capital. It is, in effect, a hypothecated corporation tax with a payroll-based eligibility threshold. We should bear this in mind when we think about how to make the levy more effective.  

One way is to lower the eligibility threshold to bring more businesses into the levy system, and introduce a progressive step system to levy rates.  

Employers are firmly in the mood for change

For instance, the current 0.5 per cent rate could apply to businesses with over £1m in payroll, rise to 1.25 per cent for those over £2m, and 2.5 per cent for those over £3m.  

This would significantly raise the revenue available to fund upskilling. This revenue should be divided according to the Labour 50–50 model: 50 per cent to fund higher and degree apprenticeships for mid-career workers over 25, 50 per cent for short course provision for all employees, which would apply above all to larger businesses. 

Apprenticeships at level 3 and below should be taken out of the levy system and fully funded through the DfE, to put apprentices on a par with their school and college peers.  

All training for 16–21-year-olds should be subject to a minimum pay mandate, set at the national living wage. This would ensure that younger workers, and those from disadvantaged backgrounds, benefit not only from upskilling but also from an additional income buffer when they commit to an apprenticeship. 

The revised levy should introduce a 20 per cent funding uplift for SMEs taking on all types of apprentices, and an equivalent uplift for all levy-payers taking on new employees as apprentices – since an estimated 60 per cent or more are currently existing employees. This should be covered by the levy income left unspent at the end of each fiscal year, which ran to £550m in 2022/23 alone. To aid with this, the levy budget should be updated quarterly to reduce the lag on “underspend” discrepancy. 

The reformed levy should raise the share that businesses can allocate to others in their supply chain from 25 per cent to 100 per cent.  

This capability should also be extended so that businesses with surplus levy funds can act as sectoral or regional “anchor institutions”, in effect sponsoring and supporting SMEs in their orbit that would otherwise struggle with the administrative burden of participating in the apprenticeship framework.  

The aim should ultimately be to create an adult skills account that empowers individual learners to take charge of their own upskilling journey.  

That is what kickstarting a skills revolution looks like. 

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