The levy you might see deducted on your payslip by the umbrella company you are contracting for is called the “Apprenticeship Levy.” It is confusing because it is not a tax on the contractor but an employer tax paid on behalf of the contractors to fund apprenticeship training across the UK.
If their total payroll is more than a certain amount, umbrella companies must cover this levy for their contractors. Once a person knows how the levy works, they will know how it is reflected on the payslip and whether it will lower their net earnings.
What Is the Apprenticeship Levy?
The Apprenticeship Levy was introduced in April 2017 to ensure more significant investment in vocational training and increase apprenticeship opportunities in various industries.
All employers with a total annual payroll of more than £3 million must pay the 0.5% levy on the total wages bill for apprenticeship programs. Employers with total payrolls exceeding £3 million receive a £15,000 allowance to offset their liability, meaning companies with smaller payrolls may not have to pay this levy.
The levy collected goes toward apprenticeship programs via an online portal, to which eligible employers have access to pay for training costs. Companies that do not use their levy funding for apprenticeships within 24 months will lose access to them, and the levy will be redistributed toward other training programs.
How Is the Levy Applied to Umbrella Companies?
A reputed umbrella payroll service in the UK, like DASA Umbrella, pays many contractors—from a few hundred to thousands. Because they operate at scale, their payroll exceeds the £3 million mark, making umbrella companies responsible for paying this levy. As a result, 0.5% of the payroll will be deducted and forwarded to HMRC.
Even though this tax is technically an employer tax, umbrella companies often distribute the responsibility across their contractors when calculating the contract rate. As such, the levy may indirectly affect your net pay rate, provided the client or agency considers that when negotiating the assignment rate.
How Is the Apprenticeship Levy Calculated and Paid?
The levy is based on an employer’s annual payroll:
- Pay over £3 million: The employer must deduct 0.5% of that amount, except for the £15,000 allowance.
- Under umbrella companies, all contractor payments fall under this allowance.
Example Calculation
| Total Annual Payroll | Levy Rate | Levy Due | Allowance | Final Levy Payment |
|---|---|---|---|---|
| £5,000,000 | 0.5% | £25,000 | £15,000 | £10,000 |
The levy should be paid monthly to HMRC as part of the umbrella company’s PAYE process. Use our umbrella pay calculator to determine how much you would pay in apprenticeship levy.
How Does the Apprenticeship Levy Affect Contractors?
Since umbrella companies have to pay this levy, they may pass on this cost to you through assignment rates. Some agencies and clients will cover this when negotiating your contractor rates, while others do not.
Usually, your net pay rate will increase to cover employer costs, including the Apprenticeship Levy, Employer’s National Insurance Contributions (NICs), and pension contributions. The levy on your payslip does not mean it is deducted from your income like a tax.
Common Questions About the Apprenticeship Levy
Why does the Apprenticeship Levy show up on my payslip?
An Apprenticeship Levy deduction may be on your payslip because umbrella companies often break down employment costs for transparency. That does not mean you are paying the levy—it is already included in your assignment rate, which provides for employer deductions like National Insurance, pension contributions, and the levy.
Do I take home less net pay after paying the Apprenticeship Levy?
The levy will not take money out of your pay; however, if your client or agency does not factor employer costs into your rate, your total deductions could seem higher than expected.
Can contractors benefit from the Apprenticeship Levy?
The Apprenticeship Levy funds training for employees across the UK. However, umbrella contractors rarely receive direct apprenticeship training through their umbrella company, as they are usually on temporary assignments from one umbrella company to another.
Is it fair that the Apprenticeship Levy affects contractors?
There has been ongoing debate about whether contractors should be responsible for this levy. Some argue that umbrella companies, being intermediaries rather than traditional employers, should not pass on employer costs to contractors.
Things You Can Do to Make the Most of Your Pay
You must understand exactly how you earn and how much you take home after deductions. Always ask the recruitment agency or umbrella company whether your assignment rate is:
- “Gross” (before employer costs): Employer deductions (Apprenticeship Levy included) are taken out before your net salary is taxed.
- “PAYE” (after employer costs): Employer deductions have already been factored into your quoted rate.
Other Ways to Maximize Your Pay
- Negotiate your rate: If possible, talk to the client or agency and ask them to include employer costs in your pay.
- Choose a compliant umbrella company: A reliable one will always be transparent about its costs and provide a clear breakdown of how your take-home pay is calculated.
- Check your payslip carefully. If anything seems unclear or incorrect, contact your umbrella company for an itemized breakdown of deductions.
