Reform UK has announced plans to introduce a new tax regime that could increase employment costs for businesses hiring foreign workers.
Under proposals outlined by Treasury spokesperson Robert Jenrick, employers would pay lower National Insurance contributions for British workers while continuing to pay higher rates for non-British workers. The party has also proposed a separate “migrant labour levy”, an additional annual charge on employers hiring foreign nationals.
Reform argues that the measures would encourage businesses to recruit more British workers and reduce reliance on overseas labour.
The proposed levy would operate on a sliding scale, with higher charges applying to lower-paid workers and lower charges applying at higher salary levels. Reform has suggested that some employers could face additional costs of around £3,750 per year for a worker earning the National Minimum Wage, although full details have not yet been published.
While the proposals remain political commitments rather than government policy, they have attracted attention because they would create employment costs linked to the citizenship status of workers rather than traditional payroll measures such as earnings or employment status.
Impact on Businesses
For small and medium-sized businesses, the most immediate concern of any such policy being implemented would be the potential increase in employment costs.
Employers recruiting foreign workers could face higher National Insurance liabilities together with a migrant labour levy. While the final design of any scheme remains unclear, the combined effect could increase the overall cost of employing certain categories of workers.
The financial impact is likely to vary significantly between sectors. Businesses that rely heavily on international recruitment, particularly in lower-paid occupations, could face the greatest exposure. Hospitality, social care, manufacturing, logistics and food production are among the sectors where employers have increasingly relied on overseas recruitment to address labour shortages in recent years.
For smaller businesses, the implications extend beyond the headline levy figures. Additional employment costs may affect pricing, profitability, expansion plans and recruitment budgets, particularly where labour costs already represent a significant proportion of operating expenditure.
Businesses with large workforces could face a cumulative impact if charges apply on a per-worker basis. Even relatively modest increases in employment costs can become material when applied across multiple employees.
The proposals may also create difficult recruitment decisions. Employers often recruit internationally because suitable candidates are not available locally, not simply because overseas recruitment is less expensive. If international recruitment becomes more costly, businesses may find themselves balancing workforce needs against increased employment costs.
From a commercial perspective, the significance of the proposals lies in the possibility of introducing a new employment cost that sits alongside wages, employer National Insurance contributions, pension obligations and other workforce expenses.
Payroll and Administration Challenges
While much of the discussion has focused on the potential cost of a foreign worker levy, the practical administration of any such system may prove equally significant for businesses.
Current payroll systems are designed to calculate tax and National Insurance based on earnings, employment status and statutory rules. They are not generally designed to apply different employment tax treatments based on citizenship or immigration status.
If the proposals were implemented, employers could be required to identify which workers fall within the scope of the regime and apply different payroll treatment accordingly. That raises immediate questions about record keeping, verification procedures and the evidence employers would need to retain.
Any system based on worker citizenship would therefore create new administrative requirements for employers. Businesses would need to determine which workers fall within scope, maintain supporting records and ensure the correct treatment is applied through payroll systems.
Questions would also arise when employee circumstances change. For example, a worker who acquires British citizenship during employment could potentially move into a different category, creating additional payroll adjustments and record-keeping requirements.
For many SMEs, the administrative burden may be as significant as the financial cost. Larger organisations may have dedicated HR, payroll and compliance teams, while smaller businesses often manage these functions with limited internal resources.
Could the Proposals Become Law?
At present, the proposals remain political commitments rather than government policy. Reform UK is not currently in government and no draft legislation has been published. Significant legal, political and practical questions would need to be resolved before any such measures could be introduced.
However, the proposals are notable because they suggest a different approach to labour market policy. Rather than using tax policy primarily to raise revenue, the measures would seek to influence employer behaviour by altering the relative cost of different categories of workers.
That principle may ultimately prove more significant than the proposed levy itself. If employment taxes become a tool for shaping recruitment decisions, businesses could increasingly find workforce planning, payroll administration and employment taxation becoming more closely connected.
While the proposals face considerable political and practical hurdles, they have already prompted a broader debate about the role of taxation in influencing labour market outcomes and business hiring decisions.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
