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Introduced by the UK government in April 2017, the Growth and Skills Levy (known as the Apprenticeship Levy prior to April 2025) is a tax designed to fund apprenticeship training. While its goal is to support long-term career development, it has led to ongoing confusion within the contractor and recruitment sectors.
Many contractors, recruitment agencies and umbrella companies are unsure who is responsible for paying the Growth & Skills Levy, how it’s calculated and what impact it has on their take-home pay or margins.
In this free guide, we will explain how the levy works, who pays it and what it means for umbrella companies, agencies and contractors.
What is the Growth & Skills/Apprenticeship Levy?
The Growth and Skills Levy, or Apprenticeship Levy, is a small government tax paid to UK employers to fund new apprenticeship training.
The tax applies to employers with an annual payroll exceeding £3 million, known as the apprenticeship threshold. These employers must contribute 0.5% of their gross payroll to HMRC, which is then stored in a digital fund. Employers can access this fund to help pay for apprenticeship training costs, supporting the development of skills in their workforce.
If separate companies form a group, or ‘company unit’, their combined payroll amount will get used for the calculation instead. This prevents companies avoiding the Levy by creating smaller subsidiaries, with wage bills below £3m.
Who pays the Growth & Skills Levy?
The Growth and Skills Levy applies to UK businesses – both public and private – with an annual wage bill of over £3m. Those companies offering apprenticeships are able to counter balance some of the costs of the Levy when training new apprentices.
Therefore, umbrella companies with an annual wage bill of above £3m, will pay the Apprenticeship Levy.
How does the Growth and Skills Levy Work?
The Growth and Skills Levy gets paid through PAYE, alongside a business’s usual tax and National Insurance payments. Once HMRC have received the Levy payment, it is set aside for the training of apprentices. The general idea is that companies who commit to training will get back more than they put in, if they train sufficient numbers of apprentices.
Below is a useful video (made before the introduction of the Levy), discussing how it works in practice.
VIDEO
The Growth & Skills Levy Explained
How do I pay the Growth and Skills/Apprenticeship Levy?
The Growth and Skills Levy is paid monthly, in a similar way to Income Tax and National Insurance contributions (NICs). There’s more information, here. If a business overpays the Levy during the course of the year, they’ll get PAYE credit by way of a refund. What’s more, according to HMRC, “Apprenticeship Levy payments are a deductible expense for Corporation Tax.”
What is an ‘annual wage bill’?
Every company will have an ‘annual wage bill‘. This includes all payments made to employees (via PAYE) which are subject to Class 1 Employer’s NICs. This includes wages, bonuses and commissions paid to all employees over the age of 16 who earn less than the Lower Earnings Limit and the Secondary Threshold. It also includes apprentices under the age of 25.
What is the Apprenticeship Levy allowance?
Each employer – including those with multiple payrolls – receives an annual allowance of £15,000. This is to offset against their Growth and Skills Levy payments.
Why £15,000? £15,000 is 0.5% (the portion of gross payroll that levied companies must pay to HMRC) of £3m (the ‘Levy-free’ wage bill threshold).
The Growth and Skills Levy doesn’t get paid on the first £3m of a company’s payroll. However, if the payroll of individual companies is linked by a group structure, the £15,000 allowance – or 0.5% of £3m – will only get applied once. Likewise, you cannot carry over any unused allowance into a new tax year.
How does the Growth and Skills Levy allowance affect which companies pay the Levy?
Here are two ‘examples’ of how the Growth and Skills Levy allowance affects who pays the Levy:
Employer A has an annual wage bill of £4.5m.
- Half a per cent of that is: £22,500.
- Subtracting the Apprenticeship Levy allowance of £15,000 would leave an annual Levy of: £7,500.
- Result = this company needs to pay the Levy.
Employer B has an annual wage bill of £1.5m.
- 0.5% of which is: £7,500.
- By subtracting the Levy allowance from this total, we get an annual Levy payment of: -£7,500.
- Result = no Levy for them.
Please Note: Unlike the Employment Allowance, the Growth and Skills Levy is paid monthly, alongside certain tax and National Insurance payments, rather than as a lump sum. The examples above are for illustration only. So, they do not reflect potential fluxes and influxes to the wage bill during the year – as may have been the case during the pandemic, for instance.
Umbrella Companies & the Growth & Skills/Apprenticeship Levy
The Growth and Skills Levy or Apprenticeship Levy only applies to a small amount of businesses in the UK, including many umbrella companies. The reason being, their business model involves the processing of contract funds and, in some cases, thousands of payments. So, despite profit levels often not being as high as other companies who pay the Levy, an umbrella company’s turnover and ‘wage bill’ tends to be substantial.
Given that its initial aim was to ‘boost investment in vocational skills’, it’s unlikely that an umbrella company – an employment-related business – will see much benefit from the Levy.
For a detailed guide on the calculation of umbrella company contractor pay, click here.
Umbrella Company Contractors & the Apprenticeship Levy
“It is untrue to suggest that umbrella companies are gaining a financial advantage from exploiting the Apprenticeship Levy.”
The way in which the Growth and Skills Levy gets applied by agencies and umbrella companies, on behalf of their contractors, remains a source of confusion amongst some industry insiders.
In the past, unions have questioned the legitimacy of the deductions made by agencies and umbrella companies in relation to the Apprenticeship Levy. Their insinuation is that agencies and umbrella companies are ‘immorally’ passing on the cost of the Levy to contractors. And, that they ‘profit’ from the Levy by charging it to their entire workforce, so they can meet the £3m threshold.
In the case of ourselves and other, compliant umbrella companies, these claims are false and unsubstantiated.
To be clear, so long as any Growth and Skills Levy deductions have been explained to and agreed by an employee at the point of on-boarding, they are entirely fair and legal. To get some more perspective on this, here’s the Danbro Group’s Managing Director, Helen Broughton MBE DL, who says it’s wrong to suggest umbrella companies are profiting in any way from the Levy.
“The Apprenticeship Levy increases the costs of employment and this is, appropriately, covered by the income that’s generated from the contract,” she said. “It is untrue to suggest that umbrella companies are gaining a financial advantage from exploiting the Apprenticeship Levy.”
“Compliant umbrella companies fulfil a much needed service, conveying many employment rights to flexible workers, which are not necessarily available to the self-employed.”
“Maintaining and adapting to the various systems and processes which ensure complete compliance with the legislation brings with it additional costs.”
“Transparency is essential to the relationships we build with our clients. So, we ensure that this small deduction is clearly shown on the payslips of all our umbrella employees.”
Why am I paying the Growth and Skills / Apprenticeship Levy as an Umbrella Company contractor?
Umbrella companies pay statutory employment costs from the income they receive from the contractor’s end client or agency. This includes Employer’s National Insurance, as well as the Growth and Skills Levy.
If you’re an umbrella company contractor, your Levy payment will be included in the ‘statutory costs of employment’ section of your pay calculation. As such, it gets paid direct to HMRC and appears on your payslip.
When you begin your contract, you should get both an assignment rate and a separate pay rate. Whether or not your pay is uplifted to account for the Levy is at your agency’s / end client’s discretion.
Your assignment rate is the amount paid by your end client for the services you’ve provided. This also includes all the necessary employment costs, such as the Growth and Skills or Apprenticeship Levy.
Your separate pay rate, meanwhile, is what you’ll receive before personal taxes – such as Income tax & Employees’ NICs – and Employees’ pension contributions get deducted.
It’s also worth stating that, as apprenticeships must last for at least one year and one day, benefitting from the Growth and Sales Levy could prove tricky for a contractor on a temporary contract of under 12 months. By providing continuity of employment, a compliant umbrella company would help with this.
For more information on umbrella companies and how they operate, check out Danbro’s exclusive blog.
Do Limited Company Contractors / Directors have to pay the Growth and Skills Levy?
The Growth and Skills Levy only applies to companies with an annual payroll of over £3m. Furthermore, the Levy only applies to businesses who pay employees via PAYE, such as umbrella companies. So, sole traders and limited company directors who pay themselves via shares and company dividends do NOT have to pay the Growth and Skills Levy.
Does the Growth and Skills / Apprenticeship Levy apply to recruitment agencies?
If you’re a recruitment agency – or an employment agency – and you:
- supply labour to a client
- pay Class 1, secondary NICs on the earnings of those workers &
- your annual wage bill exceeds the £3m threshold
… You’re expected to pay the Growth and Skills Levy
In Summary...
- The Growth and Skills Levy, formerly known as the Apprenticeship Levy is a 0.5% tax on annual payrolls over £3 million, designed to fund apprenticeship training in the UK.
- Businesses receive a £15,000 annual allowance to offset Levy payments, meaning only payroll amounts exceeding £3 million are taxed.
- The Levy is paid monthly via PAYE alongside tax and National Insurance contributions. Overpayments can be refunded as PAYE credits.
- The tax applies to both public and private employers, including umbrella companies and recruitment agencies with qualifying payrolls.
- Sole traders and limited company directors are exempt, as the Levy only applies to businesses using PAYE.
- Compliant umbrella companies ensure Levy deductions are transparently shown on contractor payslips.
The Growth and Skills Levy is included in the ‘statutory costs of employment’ section on your payslip as a contractor.
