Autumn Budget 2026: Welcome relief for employer-funded immigration costs

The announcement in the Autumn Budget offers welcome relief for employers sponsoring workers under the Skilled Worker route, with an exemption from income tax and Class 1A NIC for employer-paid Certificate of Sponsorship (CoS) fees and the Immigration Skills Charge (ISC). These are two particularly contentious costs because, in the circumstances covered by the new exemption, Home Office rules prevent employers from passing them on to sponsored workers. However, the relief is limited to these two costs for Skilled Worker sponsorship and does not extend to historical payments, sponsorship costs under other routes or other immigration costs.

How did we get here?

Over approximately the last two years, we have seen HMRC argue that, unless the exemption under the special travel provisions in ss. 373-375 ITEPA 2003 (the Home Leave Exemption) applies, all immigration costs borne by employers are taxable, including sponsor licence fees, CoS fees and the ISC.

This is particularly difficult to reconcile with the nature of these costs: the sponsor licence fee is a cost of enabling the employer to sponsor workers, rather than an individual employee’s visa application, and, depending on the route and timing, the Home Office prohibits employers from passing sponsor licence fees, the ISC and CoS fees on to sponsored workers. Treating employers as providing a taxable benefit when meeting costs they are required to bear, and prohibited from passing onto employees, sits uneasily with the nature of those obligations. Treating sponsor licence fees as taxable benefits also raises difficult questions about how a one-off, business-wide cost should be attributed to individual employees, and when any benefit arises.

Home leave: no passport to exemption

The Home Leave Exemption can provide relief for qualifying journeys between an employee’s overseas home and the UK, including certain associated immigration costs treated as travel facilities, subject to the statutory conditions. It is not a general exemption for immigration expenditure: costs must be connected with a qualifying journey.

From 6 April 2025, eligibility moved from a domicile-based test to requiring the employee to be non-UK resident or a qualifying new resident. For UK-resident employees, this generally requires ten consecutive tax years of non-UK residence before arrival, with eligibility limited to the first four tax years of residence. The relief is therefore likely to cover a narrower population, and previous eligibility assessments cannot simply be carried forward.

What is changing, and where do challenges persist?

The government will introduce legislation in Finance Bill 2026/27 exempting employer payments of CoS fees and the ISC required when sponsoring a worker under the Skilled Worker route. The announced exemption applies to payments made on or after 28 October 2026. The published policy paper confirms that it covers employees and prospective employees, whether or not employment has started when the fees are paid or the subsequent visa application succeeds. It also confirms that no Class 1A NIC charge will arise for the employer.

This is welcome, but the exemption is narrowly confined to CoS fees and the ISC under the Skilled Worker route. It does not extend to sponsorship costs under other immigration routes or to sponsor licence fees, visa application fees, the Immigration Health Surcharge and associated professional fees. The basis for drawing the boundaries in this way is unclear, particularly where excluded costs relate to the employer’s sponsorship obligations. More fundamentally, leaving a cost outside the exemption does not resolve the underlying question of whether it gives rise to a taxable benefit.

Nor is retrospective relief announced for payments made before 28 October 2026. The prospective exemption does not, of itself, establish that HMRC’s interpretation of the earlier position was correct. Employers need clarity on whether HMRC will continue to seek income tax, NIC, interest and penalties in respect of these and other immigration costs met before 28 October 2026, including in ongoing enquiries.

HMRC does not consider that it has changed its view, although its position has emerged through employer compliance reviews and discussions with stakeholders, rather than through published guidance or a formal announcement. Employers may therefore be unaware of the approach being taken or its potential implications for historical expenditure. Comprehensive published guidance on individual costs, including sponsor licence fees, visa application fees, the Immigration Health Surcharge and associated professional fees, remains needed so employers can distinguish their own sponsorship obligations from costs giving rise to an employee tax liability. That guidance should also address sponsorship costs under routes outside the new exemption, rather than leaving employers to infer their treatment from the relief available for Skilled Worker sponsorship.

The class divide: Class 1 or Class 1A?

Where immigration costs are taxable, HMRC considers the NIC treatment to depend on whose liability the employer is meeting. Sponsor licence fees, the ISC and CoS fees are employer liabilities and therefore attract employer-only Class 1A NIC. Costs that settle the employee’s personal liability, such as visa application fees and the Immigration Health Surcharge, generally attract employee and employer Class 1 NIC. Employers therefore cannot apply a single NIC treatment to all immigration expenditure.

Taxable associated professional services contracted and paid for directly by the employer also generally attract employer-only Class 1A NIC. Advice relating solely to the employer’s sponsorship obligations should be distinguished from services provided for the employee’s benefit.

Reporting obligations: P11D, payroll or PSA?

The reporting and NIC treatment depends on how the cost is met. Taxable costs paid directly by the employer to the Home Office/supplier are reportable on Form P11D for income tax purposes, unless the employer has registered to payroll the benefit. Both routes require any applicable Class 1 NIC to be accounted for through payroll; a P11D entry does not automatically mean Class 1A applies. Alternatively, employers may agree with HMRC to include eligible costs in a PAYE Settlement Agreement (PSA), allowing them to settle the tax and NIC centrally rather than report and account for the costs employee by employee. Any taxable costs reimbursed directly to the employee not included in a PSA generally need to be processed via the payroll for both income tax and Class 1 NIC purposes.

Phase 2 mandatory payrolling, currently expected from April 2028, will require real-time reporting through payroll of the remaining taxable immigration-related benefits not included in a PSA, alongside accounting for the correct NIC liabilities. This will be particularly challenging where immigration expenditure is managed by advisers, HR or finance rather than payroll.

Practical steps for employers

Employers should:

• Identify expenditure by cost category, immigration route and payment date, separating CoS fees and ISC payments qualifying for the new Skilled Worker exemption from payments before 28 October 2026, costs under other routes and other immigration costs remaining outside the relief.
• Determine the correct income tax reporting and NIC treatment for each cost and consider whether to include eligible costs in a PSA, balancing administrative simplification against the additional cost of grossed-up income tax and Class 1B NIC.
• Review current and historical treatment, including whether the Home Leave Exemption applies to each cost and employee under the conditions in force before and from 6 April 2025. Retain supporting evidence, quantify any potential exposure and consider whether corrections, disclosure, inclusion in a PSA or challenge to HMRC’s position are appropriate.
• Obtain itemised invoices and engagement terms to establish whose liability is being met and distinguish legal services relating to the employer’s sponsorship obligations from those provided for the employee’s benefit.
• Review immigration policies and any commitments to meet employees’ tax liabilities, factoring the correct NIC treatment and any gross-up into recruitment and assignment budgets. Reflect the limited scope of the new relief rather than assuming all sponsorship costs, or all immigration routes, are now exempt.
• Agree responsibilities and timely data flows between immigration advisers, HR, finance and payroll, testing how each cost category will be handled ahead of April 2028 and avoiding duplicate reporting.
• Prepare for phase 2 mandatory payrolling, currently expected from April 2028, by identifying taxable immigration-related benefits not included in a PSA, confirming the correct income tax reporting and NIC treatment for each cost, and ensuring systems and processes can handle them accurately in real time.

The Autumn Budget provides welcome relief, but the narrow scope of the exemption leaves significant gaps. HMRC must now set out clearly how excluded costs and historical payments should be treated, addressing the outstanding technical and practical questions. In the meantime, employers need to identify qualifying payments, review potential historical exposure and ensure immigration, HR and payroll processes capture the information needed to apply the correct treatment.

For further information on the above, please get in touch with your usual Crowe UK contact.