HMRC has published draft regulations to implement the new apprenticeship levy coming into force in April 2017.

What is the apprenticeship levy?

The levy is essentially a new tax on employers to be introduced from 6 April 2017, the purpose of which is to fund an increase in the number and quality of apprenticeships.

The levy will apply to all UK employers in both the private and public sectors, regardless of whether or not they have (or intend to have) apprentices.

The levy will be charged at a rate of 0.5% of an employer's payroll bill. Employers will have a fixed annual levy allowance of £15,000 to offset against their levy payment.

The draft regulations amend exiting PAYE Regulations and cover the calculation, payment and reporting of the levy including the operation of the £15,000 annual levy allowance.

What do the draft regulations say?

Employers will fall within the levy payment and reporting requirements if their total payroll bill exceeds £2.8 million in the previous tax year or is expected to reach £3 million in the current tax year.

The payroll bill is the amount on which secondary Class 1 NICs are payable, including salary amounts falling below the secondary threshold and chargeable at 0%.

The levy will be reported, through the Pay as You Earn (PAYE) process, along with Income Tax and National Insurance contributions.

In summary, the draft regulations

  • set out that an employer is required to assess their annual pay bill amount for the previous and current tax year to decide if they are liable for the levy
  • make provision for the levy to be paid by the 19th (or 22nd if the employer reports electronically) of the following month
  • place a requirement on employers to notify HMRC of the levy which is to be paid and make provision for the information which should be included in this return
  • set out how to calculate the monthly levy allowance on a cumulative basis, in order to calculate levy liability (see below)
  • allow both single and employers who are part of a group to apportion the annual levy allowance between multiple PAYE schemes (provided this is notified to HMRC in the first month of the tax year)
  • make provision for recovery of overpaid levy by the employer

The regulations confirm that the annual levy allowance will operate on a monthly cumulative basis, so the levy allowance will increase evenly throughout the year. For example, where an employer has an annual levy allowance of £15,000 and applies this to a single PAYE scheme, this would mean an allowance of £1,250 a month. Any unused allowance will be carried over from one month to the next. If the levy liability in month 1 is £1,000 the employer won't pay the levy and the allowance in month 2 will be £1,500. At the end of the tax year, if the levy has been overpaid, the employer can use the overpayment to offset against their other PAYE liabilities.

Next steps

HMRC is seeking comments on the draft regulations by 14 November 2016 following which a final set of regulations will be published. Further draft regulations covering other aspects of the levy such as assessment, repayment, recovery from third parties and records are expected to be released in the coming months.