Understanding the Apprenticeship Levy for Umbrella Company Contractors

Working through an umbrella company you’ll no doubt have noticed a deduction labelled ‘Apprenticeship Levy’ on your payslip. Whilst this deduction won’t directly impact your take-home pay, it’s important to understand its purpose and why it’s included.

In this blog we’ll explain what the Apprenticeship Levy is, why umbrella companies are subject to it and how it affects you as a contractor.

• What is it: The Apprenticeship Levy is a UK tax on employers with an annual wage bill over £3 million, set at 0.5% of the total pay bill.
• Why it appears on your payslip: The levy is deducted from the overall employment costs as an umbrella employee, before your net salary is calculated.
• Who pays it: umbrella companies with a payroll exceeding £3 million must pay the levy.
• The impact on you: Even though it appears on your payslip, the levy is part of the employment costs which are covered by SG Umbrella, and therefore does not reduce your net income.

Introduced back in April 2017, the Apprenticeship Levy is a UK government initiative designed to fund apprenticeship schemes and boost investment in vocational skills. Employers that have an annual pay bill that exceeds £3 million must pay 0.5% of their total wage bill into the levy. A £15,000 annual allowance is available to offset this cost, effectively exempting the first £3 million of a company’s payroll from the levy.

• Calculation: 5% of the total wage bill minus £15,000 allowance.
• Payment: Deducted monthly through the PAYE system, along with other employment taxes.
• Applicability: It applies to all employers, including umbrella companies, with qualifying payrolls.

As umbrella companies often have substantial payrolls due to the high number of contractors they employ, they’re liable for paying the Apprenticeship Levy. However, unlike other businesses that benefit directly from vocational training, umbrella companies usually do not operate in a way which aligns with the levy’s objectives.

• Employer status: Umbrella companies are classed as employers under UK tax law.
• Employment costs: Before the calculation of your net salary, the levy is part of the statutory employment costs that are deducted.
• No direct benefit: There is no direct benefit to the umbrella company from the apprenticeship schemes funded by the levy.

The Apprenticeship Levy is included in the ‘statutory costs of employment’ section of the pay calculation. Paid directly to HMRC, it appears on your payslip but does not reduce your overall take-home pay.

• Deductions: Employer’s National Insurance, Apprenticeship Levy, and the umbrella company’s margin are deducted from the contract rate prior to the calculation of the employee’s gross salary.
• Net salary: Your net salary is calculated after the statutory costs and any personal deductions (such as employee National Insurance, and income tax).
• Transparency: Compliant umbrellas, such as SG ensure that all deductions, including the levy, are clearly shown on all payslips.

By understanding what the Apprenticeship Levy is, it helps clarify its presence in your payslip. Whilst it might be considered an additional deduction, it’s an employment cost that SG Umbrella cover, and therefore does not impact your take-home pay.

If you have any questions regarding your payslip, or the Apprenticeship Levy, don’t hesitate to reach out to the SG Umbrella team who will be happy to answer all your questions.