Business leaders are calling for reform of apprenticeships in the UK including a new apprenticeship incentive as Britain celebrates National Apprenticeship Week.

In a letter to ministers, the British Retail Consortium, the Recruitment & Employment Confederation, UKHospitality and techUK have said that the current apprenticeship levy was unworkable and was “holding back investment”.

The Federation of Small Businesses (FSB) has added its own plea, leading calls to introduce a £3,000 apprenticeship incentive in England for under-25s and small businesses.

The calls for change came as National Apprenticeship Week got under way, bringing together businesses and apprentices to shine a light on the positive impact that apprenticeships make to individuals, businesses and the wider economy.

The letter to ministers criticised the current apprenticeship levy, introduced in 2017, where larger employers set aside 0.5% of their payroll to fund apprenticeships. The letter pointed out that the limits on how that money can be spent were so restrictive that much of it goes unspent.

Julian David, chief executive of techUK, said: “There is a real need to continue to support young people and new entrants into the workforce using apprenticeships but also to support those in the existing workforce to progress and acquire the skills they need for the future of work. The key to this will be to reform the apprenticeship levy to make it flexible and fit for purpose.”

Kate Nicholls, chief executive of UKHospitality, added: “Reform of the apprenticeship levy is urgently needed to offer greater flexibility to businesses, particularly in how funding is used.”

The FSB’s proposal is to increase the apprenticeship incentive as happened at the start of the Covid-19 pandemic.

It was boosted from £2,000 for young apprentices and £1,500 for older apprentices up to £3,000 for all age groups, which led to a 21% upturn in apprenticeship starts. However, when it was brought back down to £1,000 for under-19s and care leavers only, apprenticeship starts plummeted by 12%.

FSB policy chair Tina McKenzie said: “Empowering small employers to attract and retain top talent is a crucial step towards unlocking the full potential of small businesses, leading to improved productivity and sustainable growth.

“Apprenticeships offer a fantastic opportunity to empower young people, but success is contingent on the right support.

“The Government’s increase of the apprenticeship incentive was a welcome effort in supporting young talent during the pandemic, but that funding was temporary, and it has been disheartening to see that commitment fall away.

“The correlation between the drop in apprenticeship starts and the reduction in financial incentives is plain to see.

“As the Chancellor looks to use his March budget to boost labour market participation and growth, he could start in no better place than by using National Apprenticeship Week to announce that he will introduce £3,000 for under-25s and SMEs, which could help unlock long-term, economic benefits for generations to come.

“With FSB figures showing that a third of small businesses recognise skills shortages as a significant hindrance to their growth, the Government must prioritise upskilling the next generation who currently face a very daunting job market.”

National Apprenticeship Week runs until 12 February.