Why Do Contractors Pay the Apprenticeship Levy (App Levy)?

One of the most common questions from contractors when they first start working with an umbrella payroll service is “why am I paying the app levy?”.

App levy is passed on to the contractor as it cannot be taken from the small fee the umbrella company takes for its service.

Because of this the Apprenticeship Levy is passed on to the contractor. The problem is that the payroll figures of which the levy is calculated on does not fairly represent the true scale of the umbrella service.

As you can imagine, an umbrella service can payroll thousands of individual contractors every year. Every contractor that is paid under PAYE is an employee of the umbrella so in the eyes of HMRC, the scale of the company appears enormous.

To this fact the numbers are not a true reflection on the operational size of the umbrella with most only needing a small number of in-house employees to run the service. The problem is that the App Levy charge is based on those total PAYE numbers rather than the actual size of the umbrellas internal PAYE staff. The App Levy is calculated on 0.5% of the employer’s annual pay bill which is then calculated on every individual payment to the contractor.

Due to the umbrella company charging such a low weekly fee, there is no feasible way that the umbrella company could cover these employment costs (App levy, NIERS & Employers Pension contribution) otherwise the umbrella company would run at a loss. However the agency provides an uplifted rate when working through umbrella companies compared to in house payroll to offset these additional deductions. The majority of FCSA umbrella companies are all liable to pay the app levy charge.

If you are still unsure on why you have to pay these employments costs then give us a call on 020 3819 7220 and we will be more than happy to go over it with you.