One of contractors’ most commonly asked questions when they receive their first payslip is “why am I paying the Apprenticeship Levy?”. Continue reading as we discuss what the Apprenticeship Levy is, who is pays the Levy and why it is displayed on your payslip.
What is the Apprenticeship Levy?
The Apprenticeship Levy is a small charge payable by all employers with an annual bill of more than £3 million and was introduced in 2017 to fund new apprenticeships. The Apprenticeship Levy applies to all public and private sector businesses in the UK who pay their employees via PAYE – such as umbrella companies. The Levy is applied at a rate of 0.5% of the company’s annual wage bill minus a fixed allowance of £15,000.
If separate companies form a group or ‘company unit’, their total payroll amount will get used to calculate the amount they need to contribute towards the Apprenticeship Levy. This prevents companies from avoiding the Levy by creating multiple, smaller subsidiaries with wage bills below the £3 million threshold.
Why are umbrella companies required to pay the Apprenticeship Levy?
Most umbrella companies are required to pay the Apprenticeship Levy as they are processing large amounts of contract money, resulting in their wage bill being above the £3 million threshold. However, unlike other companies who pay the Apprenticeship Levy, umbrella companies’ payroll figures do not accurately reflect the scale and turnover of their business. This is because, aside from the margin they retain, the payments are not theirs to keep; umbrella companies will process the tax deductions for each payment and pay it directly to HMRC. The remaining net amount is paid to the respective contractor for the work they have completed for their end client.
Why am I paying the Apprenticeship Levy as an umbrella company employee?
The short answer is – you are not.
As employers, umbrella companies are legally required to pay employment taxes on any income paid to their employees. However, as umbrella companies only charge a small margin and have no financial gain from the work you are doing, they would be operating at a loss if they paid it out of their own pockets.
Instead, the employment taxes and costs are taken from the assignment rate. The assignment rate is paid to the umbrella company from your recruitment agency or end client for the assignment.
It is important to note that the assignment rate is different to the rate you get paid from your umbrella company because of the additional employment costs for the umbrella company, which include:
- Employer National Insurance Contributions
- Employer workplace pension contributions
- Holiday pay
- The Apprenticeship Levy
A compliant umbrella company will only use the money from the assignment rate to pay the employer contributions, and they will never deduct this from your gross pay.
You can find more information about working through an umbrella company and how you will be paid on the government’s website.
Why is the Apprenticeship Levy displayed on my payslip?
The Apprenticeship Levy deduction must be displayed on your payslip. It will usually be listed along with the other employment costs to show the umbrella company is making the correct employer’s tax deductions. It should equal 0.5% of your gross pay.
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If you are interested in finding out more about our PAYE umbrella service or would like to request a tailored take home pay illustration, please give our expert team a call on 01707 669023. You can also request a callback for a time that suits you, and one of our consultants will be in touch.