UK Businesses Turn to Overseas Talent & AI as Reeves’ Taxes Bite – City A.M.

British businesses are facing a “trade off” as rising costs for employers push firms into investing in overseas talent and leveraging AI. Whilst businesses are ditching the “wait-and-see” approach that engulfed firms amidst the tax uncertainty ahead of November’s Budget, this has not translated into a hiring upswing, the latest KPMG and REC jobs report showed.

Permanent placements continued to tumble, albeit at the slowest rate for 18 months. Meanwhile, temporary billings saw a modest rise for only the second time since 2024 as businesses focused on short-term flexibility over long-term headcount.

Still, the new year kicked off with a continued downturn in overall vacancies with the rate of reduction remaining “sharp”. The overall demand for staff fell for the twenty-seventh consecutive month in January with the report’s vacancies index posting a reading of 43.8, far below the 50.0 threshold indicating the neutral mark.

“The decisions firms are now making involve lots of trade-offs, such as whether to create jobs in the UK or elsewhere, or which jobs need the human touch as opposed to an automated solution,” Neil Carberry, REC chief executive, said.

Carberry added a “growing economy” would require “high levels of employment” making a focus on encouraging firms to investment “more important than ever”.

Reeves’ unemployment headache

The Labour government was dealt a major blow at the end of 2025 as unemployment surged above the five per cent mark as businesses felt the crunch of Rachel Reeves’ national insurance tax grab and hikes to the minimum wage.

In January the Office for National Statistics (ONS) said that the number of employees on the payroll fell by 33,000 in November while an estimate for December said there were 43,000 fewer jobs.

On Friday economists at the Bank of England gave a fresh warning that unemployment could peak at 5.3 per cent this year, compared to a previous forecast of five per cent.

“Skills shortages in specialist areas continue to impact the market, particularly where competition for talent remains intense,” Lisa Fernihough, head of advisory at KPMG UK, said.

Fernihough added parts of the economy were “poised for investment” and as demand for skills aligned with market stability there could be more “consistent improvement in hiring” throughout the year.

The jobs report noted despite a cooling labour market, the competition for specialist talent remained “intense”. Whilst overall staff availability rose for the thirty-fifth month, starting salaries for permanent roles increased at their quickest pace in nearly a year-and-a-half led by demand for in-demand sectors such as engineering, IT and AI machine learning.

The pressure on businesses comes as a recent report revealed that one in eight small and medium-sized enterprise (SME) leaders in the UK are actively planning to relocate themselves, their businesses, or both, citing the current tax burden. This amounts to roughly 680,000 businesses out of the UK’s 5.67 million SMEs, according to a report by Rathbones.

Among those planning to leave, a third are considering moving their companies abroad, with Ireland, Dubai, and the US topping the list of destinations. A further 26 per cent of SME leaders say they are concerned about the tax environment even if they are not planning to relocate.

Ade Babatunde, senior financial planning director at Rathbones, said: “SMEs are the backbone of the UK economy, and the fact that many are considering leaving because of taxation is deeply concerning. Their departure would mean the loss of valuable jobs and tax revenue, at a time when the government is trying to boost growth.”

The concerns come as Rachel Reeves continues to bet big on AI as a driver of economic growth. However, questions remain about the plausibility of this bet given the UK’s weaknesses in implementation, scaling capacity, and talent retention.

The tech sector has also warned Reeves to prioritise growth, with founders of firms including Revolut, ClearScore, OakNorth and Quantexa writing a letter to the Treasury warning that any move on capital gains tax, inheritance tax or a form of exit levy risks undermining confidence and pushing founders offshore.

The signatories argued that “Founders need to see a stable and favourable taxation environment in order to take the risk of building a business in the UK.”