FTI Consulting UK Public Affairs Snapshot: The Apprenticeship Levy and Britain’s skills gap

Employment and skills is a policy area where the Labour Party has traditionally felt comfortable, and there are ample avenues through which the party will seek to capitalise on this heading into this year’s General Election.

Perceived failings in Britain’s skills system have been well scrutinised and reported. While the share of young people who continue academic studies after 18 continues to grow, less than a fifth of 25–64-year-olds in Britain have a vocational qualification, compared with more than half in Germany.

Moreover, apprenticeship enrolment has fallen by a quarter since the Conservatives came to power in 2010, despite the flagship Apprenticeship Levy being introduced in 2017.

Britain’s dwindling supply of vocational skills, and its associated risks to British industry, has therefore positioned the levy as a potential core educational dispute in the run-up to this year’s General Election.

The levy requires large employers to contribute the equivalent of 0.5% of their annual payroll to a Treasury-controlled pot from which they can draw funds to pay for apprenticeship training.

However, the levy’s “use it or lose it” system and restrictions on how the money can be spent have resulted in it being vastly underutilised. In 2020/21, almost half of the Apprenticeship Levy went unspent, amounting to approximately £1.3 billion being retained by the Treasury.

In response to this, the Government is working on simplifying the levy system, reducing bureaucracy, and removing limits on the number of apprenticeships that SMEs can recruit. Despite calls from some in industry for the levy to be overhauled, the planned changes would be better described as tweaks than major reforms.

This is a notion that Labour has capitalised on, with bold proposals to convert the Apprenticeship Levy into a “Growth and Skills Levy”, enabling firms to spend up to 50% of their contributions on non-apprenticeship training. This would include modular courses and functional skills courses.

According to Labour, this more flexible approach would help to enable non-apprentices to get access to a greater range of training and, crucially, would put the current levy underspend to use. However, the Government – not without some merit – claims these proposals would result in the opposite outcome.

While Labour has said that 50% of the Growth and Skills Levy would be ringfenced for apprenticeships, the realities of the proposals are far from the party’s claims that it is doubling down on apprenticeships. By creating the scope for the funds to be used elsewhere, Labour is arguably doing the opposite. 

Pitched as a core facet of Labour’s industrial strategy, the policy has clearly been designed to appeal to businesses that see the current levy scheme as a “tax” from which, in practice, they can claw back little.

This endeavour has been successful, with support acquired from major employers including M&S, Asda, and the Co-Op, and the trade body British Retail Consortium.

Labour’s policy proposals will be characterised as making the best of a bad situation, utilising otherwise wasted funds, and providing more short training options for people to develop their skills.

Meanwhile, the Conservatives will argue that this raises new questions as to whether a Labour government would run the risk of diluting specific commitments to apprenticeship training only to achieve a worse outcome overall.

To truly get to the heart of the matter, policymakers will need to address the systemic apprenticeship supply issues that have led to opportunities being so routinely oversubscribed. So far, no party has suggested it will go this far.

Ultimately, neither party’s plan for apprenticeships should be an immediate concern for businesses. Indeed, many will be comforted by the flexibility that an incoming Labour government could afford them.

However, without a long-term strategy to improve apprenticeship provision, this short-term win could spell longer-term problems for the future of employment and skills, and for British business itself.