Labour’s “Growth and Skills Levy” – What Universities Need to Know

Around 100 universities – a majority of degree-awarding institutions – now deliver apprenticeships. The market has transformed in recent years, following major reforms including the introduction in 2017 of the Apprenticeship Levy.

The Labour Party has now fleshed out its proposal for the Apprenticeship Levy to be developed into a “Growth and Skills Levy”. Richard Guy looks at how this might work out in practice if there is a change of Government.

In my blog The Future of the Apprenticeship Levy published in January I set out the main difficulties and some possible solutions for making the Levy more flexible, in light of lobbying by employer groups such as the CBI for reform.

At that time we knew only that Labour had an intention to make the levy more flexible. Labour has now published 5 Missions for a Better Britain: Breaking Down the Barriers to Opportunity, which provides more information on how they plan to reform the Levy. So, what does Labour say and what might this mean for university apprenticeship providers?

The key proposal from Labour is to allow Levy-paying employers to use up to 50% of their total Levy contributions to fund non-apprenticeship qualifications approved by a new skills body called Skills England. Labour’s document states that Skills England will work with Government departments, an Industrial Strategy Council and the Migration Advisory Committee to identify skills and labour needs.

The list of qualifications that will be eligible for this new flexibility is yet to be determined in detail but Toby Perkins (shadow Skills Minister) said in June 2023 that qualifications for the new levy flexibility must provide “skills which add to the employability of the learner in general not just their usefulness to their current employer”. Labour’s new ‘Missions’ document clarifies that eligible qualifications would include:

• Modular courses in priority areas from Labour’s Industrial Strategy, such as digital and green skills, social care and childcare. It is possible that some of these qualifications could be delivered by HEIs.

• Functional skills and pre-apprenticeship training, likely targeted mainly at young people – unlikely to be a focus for universities.

Labour has also stated that small and medium employers (SMEs) who are not currently required to pay the Levy will continue to receive funding for apprenticeships as they do now (95% of training costs are co-funded by the state). This matters because Levy underspends by larger employers is recycled by DfE to pay for SME apprenticeships, hence Labour’s proposal prompted worries from smaller employers that a reduction in underspends by larger employers could limit access to apprenticeship funding for SMEs.

It also appears that there will now be two agencies responsible for determining the programmes on which levy funds can be spent. The Institute for Apprenticeships and Technical Education (IfATE) will continue to maintain the occupational standards for apprenticeships, while Skills England will be responsible for the new, non-apprenticeship course list. Skills England would also be separate from the Education and Skills Funding Agency, which administers apprenticeship funding.

So, what does this tell us about the possible future position?

1.       Universities that have worked hard to establish good quality apprenticeship programmes may not welcome this new flexibility for employers to spend up to half of their Levy funds elsewhere. Furthermore, initial indications about the Skills England course list suggest its contents may be better suited to FE rather than HE providers. However functional skills and pre-apprenticeship training are already fundable via existing 16 to 19, apprenticeship and adult education budgets, so it may not be necessary or desirable to fund these skills from the Levy.

 2.       Labour proposes that the Skills England qualifications list should reflect Industrial Strategy priorities (digital/data, net zero, care) as well as skills needs featured within the Migration Advisory Committee’s shortage occupation list. But apprenticeships, rather than modular courses, are better placed to respond to shortages that relate to whole occupations. For example, highly skilled occupations in science, health, IT and engineering all feature heavily in the MAC’s shortage list. Higher and degree apprenticeships already exist for many of these occupations, delivered by HEIs. If Labour wants to better align use of Levy funds with skills shortage occupations identified by the MAC, universities are ideally placed to respond via apprenticeship delivery.

3.       Having decided to offer flexibility to invest Levy funds in non-apprenticeship training, Labour has concluded that it cannot result in public money being spent on just any course that employers decide they might want or need. This is sensible given employer expenditure on training is something like £42bn per year (including wage costs), meaning that a general flexibility would swamp the Levy (which currently generates £3.6bn annually before allocations to devolved nations, translating into a £2.5bn DfE apprenticeship budget for England).

4.       Toby Perkins’ statement (above) about employability of the learner is correct from a skills policy point of view. The whole point of skills levies of any kind is to (a) require employers to pay for skills development which is greater than the individual employer’s immediate needs and to do so collectively so as to (b) avoid some employers getting out of training by “poaching” their skilled staff from “good” employers. Usually this concept of “skills greater than the employer’s immediate need” is taken to mean training for the whole of an occupation rather than just one job with one employer, giving the learner a “passport” or licence to practice that occupation with any relevant employer. That is of course an apprenticeship; so, what might this concept mean for the non-apprenticeship part of the levy? It could, for example, be about learning the skills needed to overcome barriers to progression to higher levels. These would need to be defined by Skills England for each sector.

5.       It is unclear how Labour plans to resource its commitment to maintaining SME apprenticeship funding while simultaneously allowing levy paying employers to spend unused levy resources (which currently pay for SME apprenticeships). £800m per year is invested in apprenticeship training by non-levy paying employers, paid for by Levy underspends by larger employers. Labour’s ‘Mission’ document states that all its education and skills proposals – spanning pre-school childcare to universities - are fully costed and funded, however the only additional resource identified (‘nearly £1bn’ drawn from a share of the proceeds of ending tax relief for private schools) appears pledged to school improvement, not apprenticeships. If the new levy flexibility results in a significant increase in the use of levy funds by larger employers, extra resource may be required (DfE’s apprenticeship budget was 99.6% spent in 2021/22). Here there are at least three options. Extra funds could be found from other public budgets, though the condition of the public finances may make this difficult; the rate and/or the scope of the Levy that employers pay could be extended to generate greater revenue; or it alternatively Levy resource could be freed up by limiting eligibility for apprenticeship funding for some learners (such as people on high wages or with extensive prior qualifications) and occupations. This latter option would be most unattractive to universities, particularly those delivering apprenticeships where the employer’s focus is on workforce development for current employees in middle-tier/senior roles.

6.       The ability and cost-benefit advantage of employers spending levy funds on apprenticeships varies very significantly by sector but so will the ability of employers to spend on non-apprenticeship courses. Some sectors which struggle to spend apprenticeship funding now may also struggle to take advantage of the new flexibility if the available non-apprenticeship training options present similar barriers as with apprenticeships.

Next steps and policy considerations

Clearly it would take some time for Skills England to get up and running so if Labour were elected there would be a period of policy development before its plans could be implemented. But as I said in my last blog on this subject; “no-one knows what percentage levy is actually appropriate if an employer were to use apprenticeships strategically to deal with all of their occupational training requirements”.

I would urge any new Government to begin by researching the number of apprenticeships which would be needed in each sector if employer’s skills shortages (including industrial strategy and migration skills shortage needs) were to be met. This would tell any Government the amount of Levy that needed to be raised for Apprenticeships and it would vary by sector. The non-apprenticeship requirements can then be factored in. This would then take policy to the point where a decision could be made on the size and scope of the levy, including whether it is better to allow levy paying employers to spend more flexibly or to gather the funds in first and then redistribute to SMEs (as now) but differentially across sectors.

My final note is to urge Labour to be ambitious about their Growth and Skills Levy. Skills are absolutely fundamental to Labour’s ambitions for the economic and industrial strategy.  The Levy is currently only 0.5% of payroll so a relatively small increase in this (if it were necessary) would provide very significant extra funds. 

Richard Guy is a Senior Associate at Think. In recent years Richard has worked as a policy adviser on apprenticeships and technical education at City and Guilds, and was later employed by the Institute for Apprenticeships responsible for advising the Board and for policy/quality.

Richard’s previous roles include Chief Executive of South and East Cheshire Training and Enterprise Council (TEC) in 1989; Director of Policy for the TEC National Council; and Chief Executive of Manchester TEC. In 2000 he created the Manchester Enterprises Group, a £100m turnover organisation responsible for determining and implementing the economic development strategy for Greater Manchester. He remained CEO of this group (renamed Manchester Solutions) until Oct 2013, building it into a major provider of skills, employment support and business advice. Richard is currently a governor of Oldham College. He was awarded the OBE in 1996 for services to training and enterprise.