Investment by UK employers in training has fallen by more than a quarter since 2005, and an overhaul by the government of tax incentives is needed to stop Britain “sleepwalking into stagnation in skills”, according to new research.

Employer spending per employee on training has fallen 28 per cent in real terms since 2005, dropping from £2,139 to £1,530 a year, analysis by the Learning and Work Institute think-tank found.

The decline in spending has left persistent skills shortages unaddressed, contributing to the UK’s slow productivity growth, said the institute in a report.

This is in part down to a failure by the government to provide an incentive to employers to invest in the right kind of training, it added.

“Policy has tended to focus on what we can do about publicly funded skills rather than whether we can get employers to invest more, or what are we investing in,” said Stephen Evans, director of the Learning and Work Institute.

“What you get is the same inequalities increasing over decades and decades — less investment in lower [numbers of] qualifications.”

In 2019, UK businesses invested £42bn in skills, roughly the same as they did in 2005, despite a 3.5mn rise in the number of people in work. Across the EU, business investment in training per employee is double that of the UK.

The Learning and Work Institute said UK employer spending on training did not focus on those people who needed it most.

People with degree-level qualifications were three times more likely to get training at work than those with none, the report said. Apprenticeships, funded through an employer levy, were benefiting older employees.

The Learning and Work Institute said government policy “increasingly passively follows or reinforces employer choices” to invest in high-skilled workers rather than those who were in most need of training.

To fix the problem, the institute said the government should overhaul tax credits to encourage companies to invest in the right skills.

It also recommended extending the apprenticeship levy to include more qualifications, and requiring companies to spend more than half of the funds raised from the tax on younger people.

Smaller businesses should also be able to deduct 230 per cent of the cost of accredited training from their tax liabilities, the institute said.

Those businesses in areas with low employment or skills levels should be able to deduct 300 per cent, it added.

The incentives could cost the government £500mn a year but could increase employer investment in skills by more than £1bn and help an extra 250,000 people gain qualifications, the research found.

Last month, the government indicated it would “look into” the apprenticeship levy and other taxes meant to provide an incentive to training.

But it confirmed last week that “there will not be a formal review of the apprenticeship levy”.

The Department for Education said it “put employers at the heart of the skills system” with the Skills and Post-16 Education Act, which reached the statute book last week.

The legislation affecting England places a legal requirement on further education colleges and other training providers to work with employers to develop local plans for skills.

It “will set the country up for success by giving people the skills and education that they need for work”, the education department said.