One in four small- and medium-sized enterprises (SMEs) already employ an apprentice, according to the Federation of Small Business but would more of the remaining three-quarters benefit from doing the same? In many cases, the answer is yes. The government's apprenticeship levy reforms, which are now coming into effect, mean that apprenticeships make even greater commercial sense for SMEs.
The levy is effectively a tax on employment that is intended to pay for the government's ambition of having three million apprentices in the workforce by 2020. Crucially, only firms with an annual wage bill of more than £3m are required to pay, which excludes the majority of SMEs. However, these firms will still be able to draw from the funds raised to hire apprentices for their businesses.
If you run a business that agreed to hire an apprentice before 1 May, the role will be funded on the terms in place at the time. But new rules have come into effect since then. Non-levy-paying employers now contribute 10% of the cost of training an apprentice, and the government pays the remaining 90%. Businesses with fewer than 50 employees don't pay anything if they employ apprentices under the age of 19, and even qualify for a £1,000 payment from the government. To qualify, the apprenticeship must be managed through an approved training provider.
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If that sounds an attractive deal for your business, the National Apprenticeship Service (0800-015 0600) is a good place to start with investigating the options. You'll need to commit to hiring for an agreed period apprenticeships typically last from one to four years and be prepared for your apprentices to take time out of the workplace for training. You'll also have to pay at least the national minimum wage to all apprentices over the age of 19. Apprentices are also entitled to the same rights and benefits as other employees.
Obviously, the subsidy is only worth having if apprentices benefit your business, but the National Apprenticeship Service says 96% of employers have found hiring an apprentice has helped by raising skill levels, adding to the workforce during periods of growth, freeing up existing staff for higher-value tasks and reducing the cost of recruitment. There is also evidence that apprentices tend to earn promotions more quickly than other employees suggesting motivation and talent and that they stay with the company that took them on for longer, boosting staff retention rates.
How the levy can pay for itself
The apprenticeship levy applies to firms with a wage bill above £3m a year. The tax is charged at a rate of 0.5% of a business's wage bill, with the contributions automatically deducted from its PAYE scheme.
This money goes into a dedicated apprenticeship service account for the business, where it qualifies for a 10% top-up from the government. Employers then use the account to pay for apprenticeship training with their businesses.For firms that have to pay but have no intention of taking on an apprentice, the levy reflects an additional cost they could do without. But for those firms that see the advantages of hiring in this way, the scheme has several advantages.
Most obviously, every £1 paid in apprenticeship levy is worth £1.10 when it's spent on an apprenticeship scheme, courtesy of the government top-up. Also, the apprenticeship service system streamlines the hiring process and makes it simpler for employers to connect directly with training providers.In other words, any firm that takes advantage will get more out of the scheme than they put into it, while non-participants will be worse off.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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