Small firms used to give most school leavers their first break. The levy has not changed that for the better, and the one cost nobody is helping with is the wage. Here is the money, forty years of history, and the case for letting unspent levy pay a young apprentice’s full first-year wage.
Every year, England’s biggest employers pay a skills tax that is meant to train the next generation. A big slice of it never reaches an apprentice. At the same time, the small businesses that used to take on most school leavers have stepped back, and almost a million young people are neither working nor learning.
In my last dispatch I said I would let employers use some of the levy towards a first year salary. This is the full case, with every number sourced and numbered. I think we can fix a real part of this problem with money that has already been collected.
The government does not publish a figure for how much levy money goes unspent, so I have used the best independent analysis. FE Week reports that employers are forecast to pay £4.5 billion in levy in 2026-27. Around £500 million goes to the devolved nations and £3.3 billion to England’s apprenticeship budget, which leaves an estimated £700 million not returned to the system.[1]
Employers are forecast to pay £4.5 billion. Here is how it splits.
This is not a one-off. In 2023-24 the levy raised £3.841 billion, and more than £800 million of it was held onto by the Treasury.[2] The government confirms that where the apprenticeships budget is underspent at the end of the year, the money goes back to HM Treasury.[3] And the clock is speeding up: new funds entering levy accounts will now expire after 12 months instead of 24.[4]
A 40% fall in a decade
By firm size, 2016/17 to 2022/23
The Fabian Society calls the fall in young apprentices the largest decline among advanced economies.[5] Meanwhile, 981,000 young people aged 16 to 24 were not in education, employment or training in April to June 2026, up 30,000 on the year.[7] More than half of them, around 588,000, are not even looking for work.[8] That is the number that keeps me up at night.
A £1bn scheme. Trainees paid a £25 a week allowance, not a wage.
Apprentices become employees on a wage, working to a level 3 qualification.
Funding rises. Around 500,000 starts a year, increasingly older learners.
Missed. Just over 2 million starts by 2020.
Starts fall. Small firm starts nearly halve.
Under-25 starts down 40% in a decade. 981,000 young people NEET.
Anyone who left school in the 1980s will remember YTS. The Youth Training Scheme launched in 1983, with ministers settling on an allowance of about £25 a week for trainees, not a wage.[21] From the start, some trade unions saw it as “merely a means of providing employers with cheap labour.”[22] Its predecessor, the Youth Opportunities Programme, had reached half of all 16 year olds by 1982, yet only a quarter of its trainees found a real job.[23]
For anyone who wants a nostalgia hit, here is how the government sold it on television in 1986.
By then the traditional apprenticeship was fading. Apprenticeships peaked in the 1960s, and by 1995 there were half as many apprentices in employment as in 1979.[24] Then came a genuine reset. Modern Apprenticeships were announced in 1993: apprentices counted as employees, were paid a wage and worked towards a level 3 qualification. By the end of 1998, almost a quarter of a million people had started one, and the majority of employers were small firms.[25] Small businesses were once the backbone of the system.
The 2010s brought volume. Starts rose rapidly in 2010/11 thanks to more funding, then stayed at about 500,000 a year until 2017/18.[26] But the apprentices changed. In 2006/07, fewer than 1% of starters were aged 25 or over. Today it is 45 to 50%.[27] The target of 3 million starts between 2015 and 2020 was missed, with just over 2 million.[28] Then the levy arrived in 2017, starts fell, and the mix moved upmarket: intermediate apprenticeships fell from 43% of starts in 2017/18 to 19% in 2024/25, while higher apprenticeships rose from 13% to 40%.[29]
Training for young apprentices at small firms is now largely covered. From 1 August 2026, non-levy employers recruiting apprentices aged 16 to 24 become eligible for fully funded training.[11] What the employer still carries is the wage. From 1 April 2026 the apprentice minimum is £8.00 an hour,[9] which applies to apprentices under 19 and to older apprentices in their first year.[10]
Small business groups are worried. The Federation of Small Businesses warned that firms already facing high energy and materials costs may be forced to take on fewer apprentices.[12]
full first-year apprentice wages could be paid from £700m at the statutory apprentice rate.
Kickstart did it. Employers could claim 100% of the minimum wage for 25 hours a week for six months.[13]
The Jobs Guarantee does it now. DWP funds 100% of employment costs for 25 hours a week, and Hertfordshire and Essex is one of the six pilot areas.[14] It now covers 18 to 24 year olds who have been on Universal Credit for 18 months.[15]
Think tanks are moving. The Fabian Society has just proposed letting levy funds cover half of foundation apprentices’ wages, after only 160 young people started the programme in its first nine months.[5] I would go further than half.
The system is up for grabs. Alan Milburn has suggested his NEET review could recommend a root and branch review of the £4 billion a year levy.[16]
A wage guarantee only works if it reaches the businesses that have stepped back, and only if it can’t be gamed. So the money is aimed squarely at small and medium sized employers, and how much any one firm can claim is tied to how many people it already employs.
That targeting matters because of what the UK economy actually looks like. There were 5.7 million SMEs in 2025, and 5.4 million of them were micro businesses with fewer than 10 employees.[33] Small firms like these made up the majority of employers offering Modern Apprenticeships in the 1990s.[25]
Maximum first-year wages funded at any one time, at the £8.00 apprentice rate
A cap of 10 for medium firms is not plucked from the air. Until April 2023, employers who did not pay the levy were limited to a maximum of 10 new apprenticeship starts, before the limit was lifted.[32] Linking the number to headcount keeps the money spread across thousands of small firms rather than soaked up by a few.
New jobs only. Borrowed straight from Kickstart, whose placements had to be new jobs that did not replace existing or planned vacancies or cause existing staff to lose or reduce their work.[35] Here it is tested on headcount: if a firm’s other staff numbers fall, payments pause.
Paid monthly, in arrears. The wage at the apprentice rate is paid to the employer each month for the first 12 months. Firms that pay more than the minimum top it up themselves.
Keep them, get the rest. The final three months are released once the apprentice reaches 12 months in the job, so the money rewards retention.
No minimum size. Kickstart originally made smaller employers offering fewer than 30 placements go through a gateway organisation to apply.[36] This scheme starts with the smallest firms and lets them apply directly.
Stacks with what already exists. Employers already pay no employer National Insurance on apprentices under 25, on earnings up to £967 a week.[34] With the wage covered too, the employer’s main first-year costs become supervision, training time and any pension contributions.
In plain terms: a micro business taking on its first apprentice would have that young person’s first-year wage paid in full. A 60-person manufacturer could train up to 10 at once. And a large firm already paying the levy would not qualify at all, because it already has its own pot.
That is today’s rule, set by ministers, and they have already bent it. £140 million of the apprenticeship budget went to mayors for a brokerage pilot, apparently the first time levy funds have been used beyond training and incentives.[5]
The risk is real. Kickstart was designed assuming only half of its jobs’ output would be genuinely additional.[17] Even so, for every 100 young people who took part, 11 more were in unsubsidised work two years later than a similar group who did not.[18] So build in safeguards: first year only, a real qualification, no replacing staff, a cap per firm and a clawback if an apprentice is let go without good reason.
True. The first ever overspend in 2024-25 forced a £345 million top-up. But the estimated £700 million gap remains even after the budget rose to £3.3 billion.[1]
One survey found apprenticeship hires up 7.7% in 2025/26, with 73% of SME leaders willing to hire. The same survey found government admin had become a barrier.[19] The willingness is there. A wage guarantee could turn it into jobs, and the admin needs fixing too.
Young people are not the skills gap. They are the answer to it. Let us give small firms the means to take the first chance on them.
Opinions in this piece are marked as the author’s own. The £700 million is FE Week’s estimate from published forecasts; the government does not publish an official figure. Calculations are ours and cover gross wages only. Funding rules are changing through 2026, so check current GOV.UK guidance before acting on any figure here.
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