Government must urgently reform the failed Apprenticeship Levy, says Fabian Society

New data shows employer investment in training has plummeted by £9.5 billion since the Apprenticeship Levy was introduced, while skills shortages have increased by 18 per cent.

• Apprenticeships for those under 25 have fallen by a third (34 per cent), with level 2 apprenticeships down 72 per cent. At the same time, £400 million (16.6 per cent) of levy funding is spent annually on people who already have a degree-level qualification.
• There is strong employer support for a levy, with two thirds (67 per cent) of levy-payers backing a levy. However, employers want the levy to be more flexible, with 70 per cent wanting to be able to use funds on other forms of training beyond apprenticeships.

A new report from the Fabian Society and supported by Youth Futures Foundation and the CIPD, released today (Wednesday 13th August) lays bare the failure of the Apprenticeship Levy, and calls for urgent and fundamental reform of the levy, to drive growth and tear down barriers to opportunity.

The levy was introduced in 2017 to create more apprenticeships; meet employer skills needs; and to drive social mobility. Large employers pay 0.5 per cent of their payroll costs above a threshold of £3m into a digital account. The funding is used to cover the costs of training apprentices.

The report, ‘Growth and Opportunity: making the Growth and Skills Levy work', finds the levy has been a resounding failure. Since it was introduced, total employer spending on training has fallen by £9.5 billion in real terms, with the number of vacancies unfilled due to skills shortages increasing by almost a fifth (18 per cent). Apprenticeships are down by a third (34 per cent) for under 25s, whilst over £400 million of levy funding is spent annually on people who already have a degree-level qualifications.

The government has committed to reforming the levy into a ‘Growth and Skills Levy'. The report sets out three principles that should guide the reform of the levy.

Firstly, the Growth and Skills Levy must be both more flexible and more strategic. Employers across all sectors should be able to use levy funds on other forms of high-quality training beyond apprenticeships. There is strong employer demand for this. New survey data shows seven in ten (70 per cent) want to be able to invest levy funds in other forms of training, including shorter and modular training.

The levy should be better linked to both the government's industrial strategy and immigration policy, with grants worth £3,000 for employers to invest in skills crucial to growth sectors, and where there are shortages in the UK-based workforce.

Secondly, the system must be rebalanced to ensure it works for those who could most benefit from access to high quality training. Only apprenticeships for workers without a degree level qualification should be funded through the levy. In addition to the restrictions to level 7 apprenticeships recently announced, this measure would save £270m, which should be redirected to investment for young people and lower-level qualifications. A new Apprenticeship Grant for Employers should be introduced, providing a £3,000 cash incentive for employers taking on young apprentices.

Finally, the Growth and Skills Levy must boost employer investment in skills. Improving the skills of the workforce is vital to driving productivity and growth, yet both public and employer investment in skills have fallen in recent decades.

The levy is not raising enough funding, and much of the revenue raised is not being invested in skills.

New analysis shows £4.5bn of revenue raised by the levy has been retained by the Treasury since 2017. Partly as a result of this, the apprenticeship budget was over-spent for the first time last year. The report calls for an Employer Growth and Skills Fund, bringing together all revenue raised by both the levy and the Immigration Skills Charge, with funding ringfenced for employers to invest in skills.

The report further calls for the levy to be both expanded and increased to turbo-charge employer investment. Currently just 2% of employers pay the levy. Lowering the threshold at which employers pay the levy to £1 million, would triple the number paying in and help reverse the decline in apprenticeships at SMEs. The government should also increase the levy to 0.7 per cent for large employers. Taken together, these measures would increase funding raised by over half (53 per cent), driving investment in skills, and enabling greater flexibility.

Joe Dromey, Fabian Society General Secretary and co-author of the report, said:  

“Investing in the skills of our workforce will be essential if we are to unlock growth and spread opportunity.

“But the apprenticeship levy has been a resounding failure. Since it was introduced, we've seen both employer investment in skills and apprenticeship starts plumet. The number of entry level opportunities for young people has collapsed, while employers have increasingly invested in workers who are already well qualified.

“The government's commitment to reform the levy is hugely welcome, but we need to see progress soon. The Growth and Skills Levy must seek both to boost employer investment, and to redirect it towards those who could most benefit.”

Barry Fletcher, Chief Executive of Youth Futures Foundation, said:

“The best international evidence tells us that apprenticeships can be an impactful, high-quality route into good jobs for young people, particularly those from marginalised backgrounds. Yet in the UK, not enough young people can access them; apprenticeships for under 25's have fallen by a third, with level 2 apprenticeships in particular plummeting by 72 per cent in recent years.

With the staggering challenge we face of 1 in 8  young people not earning or learning, it is essential public policy ensures we reverse this trend in the apprenticeships system.  If designed well, the new Growth and Skills Levy presents a vital opportunity to help redress this imbalance  and restore these opportunities for young people whilst also giving employers greater flexibility to invest in a broader range of accredited training.

This report outlines serious options for policymakers to consider in making the structural reforms needed for a future levy to – drive opportunity and long-term growth for employers, young people and our economy at large .”

Peter Cheese, chief executive of the CIPD, the professional body for HR and people development, said: 

“The Growth and Skills Levy can play a critical role in encouraging employers to boost much needed investment in skills, innovation and growth across the economy.  

“Designed in the right way, it can reverse the decline in apprenticeship and training opportunities for young people, provide more fairness of opportunity, and turbo-charge the upskilling of the wider UK workforce to help address skills gaps and reduce reliance on migrant workers. 

“This report highlights continued strong employer support for the principle of a levy to increase investment in skills but with greater flexibility and a more strategic focus, as well as other ways to increase funding to support the skills system. 

“The key next step will be for Government to set out a timetable and consult meaningfully with employers and other key stakeholders on how best to structure and position the new levy, building on learnings from the shortcomings of the current system. This will ensure its design and funding model are workable and can meet the needs of businesses and learners in all sectors of the economy.”