The role of apprenticeships in the UK economy and how to improve the Apprenticeship Levy

Enterprise Nation hosted an informal policy dinner on 19 March with senior government policy makers and business leaders to discuss how to make the Apprenticeship Levy as effective as possible.

The Apprenticeship Levy is paid by large companies to cover the costs of apprenticeships. Firms can transfer a proportion of unspent funds to small companies. This was originally 25%, but on 18 March prime minister Rishi Sunak announced it has been increased to 50%.

Representing the government at the dinner were Kate Ridley-Moy, director of apprenticeships and skills bootcamps at the Department for Education, and Jennifer Coupland, chief executive of the Institute for Apprenticeships and Technical Education.

We were also joined by business leaders from Sage, Vodafone Business, Google, Lloyds Banking Group, Cisco, Employment Hero, Smart Pension and IQE PLC.

The importance of apprenticeships

There was general agreement that developing a pipeline of skilled workers through apprenticeship programmes is vital for businesses across all sectors.

It was highlighted that large companies have developed their own apprenticeship programmes out of necessity, recognising that their ability to adopt new technologies depends on having employees with the right skills.

The challenge for SMEs

It was suggested that while large companies have established robust apprenticeship programmes, smaller companies continue to face significant hurdles in engaging with the apprenticeship system.

Representatives cited a range of barriers, including a lack of capacity to provide mentorship, administrative burdens, cashflow constraints from covering wages during training and a general lack of understanding of how to navigate the system effectively.

In terms of the administrative burden on SMEs, it was suggested that the requirement to make a 5% contribution could take up valuable time and resources of a small business owner.

In addition, the transition of apprentices to full-time employment after training poses a financial challenge for smaller businesses. It was also suggested that many SMEs may lack the necessary resources and support structures to properly mentor and develop apprentices.

The role of the Apprenticeship Levy

The discussion revealed some complexities and misunderstandings about how the levy system works. One attendee suggested that when large employers transfer some of their levy funds to SMEs, they have no visibility over whether those apprentices complete their training.

The funds are committed upfront, creating a financial risk if apprentices drop out midway through their programme. They felt this acts as a disincentive for larger companies to maximise their levy transfers.

The discussion clarified that unspent levy funds are redirected to the apprenticeships budget to support apprenticeships for SMEs. As such, if some large employers do not spend their full levy, this increases the availability of funding for SMEs.

The need for wraparound support

Despite the availability of funding, several participants stressed that money alone is not enough to increase SME engagement with apprenticeships. They argued that large employers should provide more wraparound support, using their expertise in areas such as HR, mentoring and programme administration to ease the burden on smaller firms.

By engaging SMEs in their wider talent development initiatives, large companies can help to create a skilled workforce throughout their supply chains and local communities.

Possible reforms and flexibility

Looking to the future, some in the room expressed concerns about maintaining quality standards if the levy is expanded to fund a wider range of skills training programmes beyond traditional apprenticeships.

The discussion covered the government's commitment to ensuring that all government-backed training, regardless of format, is based on employer-defined standards. There was also openness to piloting more flexible models, such as accelerated 'bootcamp' programmes, to quickly upskill workers for in-demand roles.

The discussion covered the Institute for Apprenticeships and Technical Education's (IfATE) key role in setting training standards based on input from employers about the knowledge, skills and behaviours needed in the workplace and how employers' confidence in the skills system grew when they knew other employers had designed apprenticeships.

Participants also discussed the importance of this employer-led design process as a quality safeguard for the system and how this is being broadened out by IfATE beyond apprenticeships to link other technical qualifications and bootcamps back to the same employer standards to maintain this thread of quality across different training products.

Various ideas for possible reform of the Apprenticeship Levy were discussed, including:

• Increasing the flexibility of how the apprenticeship levy can be spent, such as on masters-level programmes, bootcamps and other forms of skills training beyond apprenticeships.

• Improving communication about how the levy system works, particularly what happens to unspent funds, to address misunderstandings.

• Trialling more flexible apprenticeship models tailored to industries that rely more on contract work, such as the creative sector.

• Streamlining administrative processes for SMEs to access funding through greater use of technology.

• Allowing larger employers to take on more of the burden of training and support, rather than expecting SMEs to have dedicated HR and skills departments.

• Allowing levy payers to return a proportion of their levy directly to the government, rather than having to find organisations to donate funds to.

• Exploring the use of unspent levy funds to address barriers such as wage costs for SMEs taking on apprentices.

Building a robust talent pipeline

Ultimately, the consensus was that a multi-pronged approach is needed to meet the UK's skills needs. While apprenticeships are a powerful tool, participants agreed that large organisations need to look beyond simply recruiting for immediate vacancies.

By strategically investing in apprenticeship programmes, working with training providers and universities, and offering more entry-level opportunities and other forms of training, large companies can help build a robust pipeline of home-grown talent to drive long-term growth and productivity across the economy.

The roundtable highlighted that skills development is a team effort, requiring coordination between employers of all sizes, government agencies and educational institutions.

There was broad consensus around the need for evolution rather than revolution in skills policy, building on and improving on what's working rather than wholesale revolution.