Apprenticeships: unlocking the opportunity

The Apprenticeship Levy was introduced to create long-term sustainable funding for apprenticeships and empower employers to provide staff with a range of training opportunities. All UK employers with a PAYE bill of over £3 million contribute 0.5% of their annual pay bill towards the levy, which can then be used on apprenticeship training costs (excluding apprentice salaries). If employers do not use their funds within two years, they ‘expire’ and are handed back to the Treasury.

Since the introduction of the levy, we have closely tracked apprenticeship trends, particularly employers’ uptake and fund expiry. We have found that while HMRC collects nearly £3 billion in funds from levy payers each year, employers have consistently underutilised funds. Since May-17, £11.5bn has been collected, yet only £3.6bn spent on training and a further £3bn handed back to the Treasury. With around £5 billion of remaining unspent funds at the end of 2021, it presents employers with an opportunity to reskill and upskill their workforces, and training providers with an attractive growth potential.

Impact of the levy

When the levy was introduced in 2017, the number of apprentices initially decreased across the UK as employers and training providers transitioned to the new system. Figures from the Department of Education (DoE) show that the impact was particularly noticeable in some occupational sectors – health and social care fell 67% vs a market-wide drop of 24%.

Apprenticeships have traditionally been associated with younger people entering vocational career paths. The new levy system broadened the potential remit of apprenticeships and despite the new system allowing greater flexibility, some levy payers have taken time to understand how apprenticeships might be relevant for their industry and workforce.

However, the Employer Skills Survey 2019 showed that 62% of employers claimed that there were structural barriers preventing them from using apprenticeships. One hurdle has been the requirement for apprentices to have 20% off-the-job training. While this is often viewed as a requirement for apprentices to spend one day a week at college, there are in fact a range of activities employees can perform that adhere to this requirement while still being productive for employers. Supporting other functions within the same business, or gaining experience on anything outside of the apprentice’s immediate job description can count towards this training allowance. Other reasons cited for lower adoption include an active decision not to offer apprenticeships (32%) and a lack of awareness of the scheme (9%).

As a result, proactive training providers have played an important role in educating employers on how to ‘unlock’ levy funds.

A strategic priority

More recently, however, businesses have begun to see the levy as a strategic priority. As levy funds started to expire in May 2019, there was an uptick in employer spend per month, reflecting internal pressures from finance directors and CFOs to maximise usage. Despite this, spend remains considerably lower than contributions and according to the DoE, 30% of levy payers are yet to register apprenticeship service accounts, suggesting further headroom for uptake.

Today we see a wide range of businesses now paying into the levy and investing in apprenticeships (from the NHS, through professional services, financial services, health and social care, engineering and many more).

There are a growing number of ‘high value’ levy employers, with close to 4,000 firms paying more than £100k towards it per year, and around 600 paying more than £1m per year. Many of these employers are utilising the levy to support longer-term recruitment and skill requirements. It presents an opportunity for businesses to reconfigure the workforce post-pandemic and bridge the current skills gaps. Apprenticeships in priority skills areas (such as digital and technology) have experienced strong growth in particular.

The apprenticeship levy is an employer-led system, with employers forming trailblazer groups to design programmes fit for their needs. This has expanded the pool of employees that apprenticeships can apply to, with over 650 programmes now available to organisations, from highly specialised profession-related training to generalist skills (e.g. leadership). A further 50 are currently in development, reflecting employer appetite to design the system to meet their needs.

This shift to an employer-led system has resulted in an increase in higher level programmes as businesses are able to use apprenticeships to upskill their existing workforce as well as train new recruits. Degree apprenticeships in particular are increasingly attractive as student finance is more expensive. These apprenticeships typically have higher funding available, presenting greater value to training providers and employers, though some courses (e.g. apprentice MBAs) have come under criticism for value for money, and higher fee courses may be susceptible to funding band changes in the future.

The future of apprenticeships

COVID inhibited starts further as lockdowns impacted employment and training delivery, and broader economic uncertainty reduced uptake. Post pandemic, we’re now seeing those sectors hit particularly hard, e.g., construction and hospitality experience strong growth.

The levy benefits from cross-party support and has been promoted as an employer-led system. Though some lobbying groups have called for a widening of the levy’s use (e.g. for broader learning and development, or to pay apprentice wages), these do not appear to have gained much traction with policymakers. Nonetheless, there have been tweaks to the levy system, and these look set to continue. Rishi Sunak’s recent spring statement mentioned the potential for a review of the levy, though overall sentiment in the market suggests that radical changes to the way the levy operates does not appear likely and the Treasury stated that no formal review is planned.

The introduction of the levy was met by an influx of training providers joining the register of apprenticeship training providers (RoATP), reaching 2,600 organisations at its peak. The provider base is now consolidating around fewer, higher-quality providers that are able to deliver at scale, with 1,750 approved providers in March 2022. Of these, 1,500 are actively delivering training, yet the top 100 make up 50% of market apprenticeship starts. These providers are increasingly investing in technology to offer employers more engaging learner experiences and support necessary quality and funding compliance processes.

With close to £5bn in employer accounts ready and waiting to be spent on apprenticeships, and an increasingly strategic approach taken by employers, there is a sizeable market opportunity for training providers and investors to access as the market consolidates further.