Immigration cap and curb on overseas students threaten to divide cabinet

New moves to curb overseas student numbers threaten to trigger a fresh dispute within the coalition cabinet over immigration.

The home secretary, Theresa May, made clear today that looking at the number of those students was an "important part of the overall picture" of bringing immigration to Britain under control.

The number of overseas students rose by one third to 273,610 last year, but Uni-ersities UK, the umbrella group for vice-chancellors, warned that the curb on overseas skilled migrant workers announced today could also hit colleges as 10% of their staff come from outside Europe.

The education secretary, Michael Gove, and the universities secretary, David Willetts, privately warned last week that too rigid an immigration cap could hit Britain's competitiveness and reputation among top overseas students. The business secretary, Vince Cable, voiced his concerns in public about a too-inflexible cap.

May unveiled a highly "business friendly" consultation paper today outlining how the new annual limit for skilled migrants – to be introduced from next April – might work. A temporary cap to be imposed from July – to prevent a surge in applications ahead of the cap – includes such widespread exemptions that nearly half those who currently qualify for skilled worker visas will be exempt. The exemptions include multinational companies transferring staff and elite sports people, so new restrictions on the use of overseas players in football's Premier League are ruled out.

May said the business community would be consulted before final proposals for an annual limit were drawn up by the government's migration advisory committee. Research is also to be conducted this summer on the social impact of migration, including on public services.

The temporary cap will reduce the number of skilled migrant visas by 1,300 over the next nine months to a total of 24,100, which led some critics to describe it as a "modest tweak to the points based immigration system".

But others criticised the moves to an overall limit. Care home owners, who have been relying on overseas skilled care staff, were particularly critical, dismissing claims that their needs, particularly for English speaking staff, could be met from within the EU as unrealistic. The Highly Skilled Migrants Forum and the Joint Council for the Welfare of Immigrants argued that the cap would be unworkable and could damage the economy. The forum warned that a curb on international students would put at risk the £12bn a year generated by their fees.

The Tories' campaign pledge to bring net migration – the flow of migrants into the country minus the number leaving to live abroad – down from hundreds of thousands to tens of thousands is widely credited as a crucial factor in David Cameron's general election success.

The cap will operate by being bolted onto Labour's five-tier points system and will cover tier one – investors, entrepreneurs and the most highly skilled – and tier two – skilled migrants with a job offer which cannot be filled by a British worker. The number of the most highly skilled migrants will be capped over the next nine months at 5,400 – the same as in 2009. Investors, entrepreneurs and those staying on to work after studying at a British university are to be exempt from the new limit but the points needed to qualify in tier one is to be raised by five to ensure those who come really are the "brightest and the best".

The temporary limit for tier two will be 18,700 – 5% lower than this year's numbers. But staff transfers within multinational companies, mainly Indian IT contractors, will be exempt although this may be restricted to those here for 12 months or less in the final scheme.

The consultation paper also suggests making private health insurance compulsory for skilled migrants by giving extra points to those who agree to take it out.

It also raises the prospect of a quarterly auction of skilled migrant visas, suggesting firms could bid for sponsorship certificates with those willing to pay the highest fees getting the right to import skilled labour. But the paper makes clear that the government is much more likely to adopt a US-style "first come, first served system" for tier two skilled migrants and a separate New Zealand-style "pool" system for the most highly skilled in tier one.

This would involve those who qualify paying to join a "pool of applicants" who would be invited to apply to come to Britain according to the quota. Those who did not make the cut within six months would be removed from the pool.