The tax implications of immigration to the UK - Observatory on Migration (2023)

This briefing provides an overview of research on the impact of immigration on public finances in the UK.

The tax implications of migrating to the UK are small and vary across migrant groups (e.g. EEA migrants vs. non-EEA migrants, recent migrants vs. all migrants).

There is no single “correct” estimate of the tax impact of migrants. Different studies make different assumptions, and not all will agree on which assumptions are best to make (see Understanding the Evidence above). Studies examining the tax impact of migrants have come to mixed conclusions, although in all cases the impact has been estimated at less than +1% or -1% of GDP.

There are two points on which studies unanimously agree. First, the tax impact of EEA migrants is more positive than that of non-EEA migrants; and second, that the influence of recent migrants is more positive than the influence of migrants as a whole. Table 1 summarizes the results of the most recent studies on the net fiscal impact of migrants in the UK.

A study by Oxford Economics (2018), commissioned by the Migration Advisory Committee, estimated the net fiscal contribution of EEA migrants in financial year (FY) 2016/17 at £4.7 billion, compared with a net cost of £9 billion for non- EEA migrants. During this period, the UK ran a budget deficit, so it is estimated that UK-born people also made a negative net tax contribution (of -£41.4bn). In contrast, using a similar methodology but slightly different assumptions, Migration Watch UK (2016) found that both EEA and non-EEA migrants incurred a net fiscal cost in FY2014/15 (of £1.2bn). £15.6bn respectively). Much of the difference between these studies stems from the choice of how much of the tax paid by companies is attributable to migrants.

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Oxford Economics (2018) found that the negative net tax contribution of non-EEA migrants was primarily due to higher spending on children's education, as non-EEA migrants are currently more likely to have dependent children than UK-borns . They were also estimated to receive more family benefits and tax credits. Separate calculations in the same study, looking at the whole life cycle of non-EEA migrants and excluding the costs of children, did not reveal any negative impacts for this group (see below).

Table 1

Different estimates of the tax impact of immigration to the UK, in £ billion (with annual average)

All migrants and born in the UKNew migrants only
EEAnon-EEABritish bornEEAnon-EEA
Oxford Economics (2018)
FY 2016/17 (1 year)+4,7 Mrd. £-£9.0b-£41.4b
Migration observation (2016)
FY 2014/15 (1 year)-£1.1b-15,6 Mrd. £-£87.8b£0.0-6,2 Mrd. £
Dustman and Frattini (2014)
1995-2011 (17 years)+£4.4b
(+£259m pro)
-£118b
(-£6.9bn per year)
-£591b
(-£34.8bn per year)
2001-2011 (12 years)-£617b
(-£51.4bn per year)
+20,2 Mrd. £
(+£1.68bn per year)
+5,2 Mrd. £
(+£0.43bn per year)
2001-2011 (A10) (12 years)+4,9 Mrd. £
(+£0.41bn per year)
2001-2011 (Rest of EEA) (12 years)+15,3 Mrd. £
(+£1.28bn per year)
Rowthorn (2014)
2001-2011 (12 years)-0,3 Mrd. £
(-£25m per year)
-29,7 Mrd. £
(-£2.48bn per year)
Migration observation (2014)
1995-2011 (17 years)-13,6 Mrd. £
(-£0.8bn per year)
-134,9 Mrd. £
(-£7.94bn per year)
-£565b
(-£33.2bn per year)
2001-2011 (12 years)- 13,4 Mrd. £
(-£1.12bn per year)
- £116,8 Mrd
(-£9.73bn per year)
-£586b
(-£48.8bn per year)
-0,25 Mrd. £
(-£20.8m per year)
-27,17 Mrd. £
(-£2.26bn per year)
Dustman and Frattini (2013)
1995-2011 (17 years)+8,8 Mrd. £
(+£0.52bn per year)
-£104,1b
(-£6.12bn per year)
-£605b
(-£50.4bn per year)
2001-2011 (12 years)-£605b
(-£50.4bn per year)
-£86.8b
(-£7.23bn per year)
-£624b
(-£52bn per year)
+22,1 Mrd. £
(+£1.84 billion per year)
+2,9 Mrd. £
(+£242m per year)

Source: Analysis of various Migration Observatory studies (see references for citations).

Similarly, studies have consistently found that recent migrants have more positive tax implications than those who have been here longer. For example, Dustmann and Frattini (2014) estimated that over the 11-year period from 2001 to 2011 inclusive, EEA migrants who had arrived since 2000 made a net positive tax contribution of just over 20 billion to all migrants between 1995 and 2011. Migration Watch (2016 ) are also less negative for new migrants than for migrants overall; They estimated that non-EEA migrants had net tax costs of 15.6 billion in 2014/15. There may be several reasons for this, including changes in the characteristics of newcomers over time and the fact that people are looking for some years of residence are more likely to have children.

The net fiscal effects of immigration depend on migrant characteristics such as age, skills and income

Whether migrants are employed and how much they earn has an important impact on their estimated net tax contribution. The OECD (2021) compared estimates of net contributions to the tax and benefit system in 25 OECD countries over a 13-year period from 2006 to 2018. It found that the age of migrants (especially prime working age, i.e. 25-54) was the single most important factor explaining the differences in their net tax contributions compared to the native-born population. A key reason for this is that migrants in this age group are most likely to be employed. The skill level of migrants is also likely to be one of the main determinants of their fiscal impact in the short term. Highly skilled migrants working in high-paying jobs can be expected to pay more tax on average than low-skilled migrants in low-wage jobs, although in the UK some migrant groups are characterized by a significant skills mismatch when working below their actual employment skill level (ONS 2016).

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The use of public services and benefits by migrants also depends strongly on their age and household situation. In a series of stylized calculations for various sample household types, Oxford Economics (2018) found that a single 20-year-old with no children needed to earn just over £10,000 a year to break even from a tax perspective. while a couple with two dependent children - who spend much more on health and education - would only become net contributors once they had earned around £45,000.

As mentioned above, the fact that non-EEA migrants are more likely to have dependent children is a key reason why non-EEA migrants have a negative net financial impact in the short term. The same Oxford Economics study estimates that the average non-EEA migrant arriving in 2016 would make a net positive tax contribution (of £28,000, NPV) over its life cycle. However, their children's education is not included in this latter figure, as under this life cycle method the cost of education is charged to the child and is expected to be offset by income taxes when they enter the labor market.

Recent government data shows that EEA nationals pay more in income taxes and social security contributions than they receive in tax credits and child benefits - but that doesn't tell the whole picture

In recent years the government has released data collected by Her Majesty's Revenue and Customs Authority (HMRC, the government agency responsible for collecting taxes and paying certain benefits) and the Department for Works and Pensions (DWP). Amounts paid and received by foreigners originate from nationals. For example, HMRC data shows that in FY2018/19 (the most recent year for which data are available), EEA and Swiss citizens paid £22.4 billion more in income tax and national security contributions than they received in tax credits and child benefits have HMRC, 2022). Non-EEA citizens (and non-Swiss) paid £20 billion more in income tax and National Insurance than they received in tax credits and child benefits.

illustration 1

These figures are not at all comparable to the studies discussed above as they merely compare some amounts received by HMRC in direct taxes with amounts paid out by HMRC in cash benefits. This calculation does not take into account that individuals pay other taxes such as VAT and Council Tax, or that they also receive other benefits such as Universal Credit and Jobseekers' Allowance (JSA), and also use public services. However, the data provide more detailed information which, by and large, shows that taxpayers from the EU-15 countries paid more than the average taxpayer, while those from the newer Member States paid less.

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The Office for Budget Responsibility predicts that higher net migration will ease pressure on public debt over time

The Office for Budget Responsibility forecasts fiscal aggregates - such as government net debt and debt as a percentage of GDP - under alternative net migration scenarios.

For example, OBR (2018) based its key budgetary projections on the assumption that net migration will average 165,000 per year over the coming years. However, she estimated that net immigration of 245,000 (the “high migration scenario”) would mean that the primary budget deficit (i.e. excluding interest payments on debt) would be 0.8% of GDP lower by 2067-68, and net debt would be lower 30% lower.

One of the main reasons for these results is that arriving migrants are more likely to be of working age than the general population and therefore more likely to be working and contributing to public finances. These forecasts extend up to 50 years into the future. In a previous analysis, the OBR (2013) found that over a time horizon even longer than 50 years, these migrants would also retire and increase age-related spending pressures. It concluded that "greater migration might be viewed as delaying some of the fiscal challenges of an aging population rather than as a way to permanently solve them".

The government estimated that ending free movement would have a small net fiscal cost

The central policy of the government's new points-based immigration system, which will come into force on 01.01Policy Primer: The UK Points-Based Immigration Scheme 2021). a governmentimpact assessmentThe Skilled Worker Route estimates that it would have a total tax cost of £2.4 billion over the first ten years of implementation. The calculation takes into account a range of costs and benefits, including the tax cost of providing public services, tax benefits from tax revenue, revenue from visa fees and the cost to the Home Office of managing the route. These costs represent a small fraction of the total UK GDP estimatedapproximately £2.4 trillionend of 2021.

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This overall cost is mainly due to the fact that fewer EEA migrants are expected to come to the UK, which would reduce tax revenues. These losses exceed projected savings if no public services or benefits are provided to EEA migrants). The projected increase in non-EEA migrants offsets some of these costs, but not enough to make the overall policy impact positive.

The government also published oneimpact assessmentfor the Hong Kong British National (Overseas) visa, which included estimates of its tax implications. Under the "central scenario", which assumes around 290,000 BNO applicants in the first five years of the policy, the Home Office estimated that BNO migration along the new route would generate a net tax benefit of €2.65 billion in the first five years of the policy £ would generate (from Q4 2020/21 Q4 to 2025/26 Q3). These included several tax costs and benefits: the cost for businesses to become familiar with the directive; the costs for the Ministry of Interior for processing the visa route; the increase in the cost of providing public services (e.g. health care and education); the increase in government revenue from the BNO visa fee and the immigrant health surcharge; and direct and indirect tax revenues from BNOs in the UK. The estimate is based on several assumptions and is presented as "highly uncertain" (for more details see our).

Evidence gaps and limitations

Estimates of the tax impact of immigration are subject to many limitations. For example, the studies discussed in this briefing rely primarily on the Labor Force Survey (LFS) to look at the characteristics of migrants and the factors related to tax contributions (e.g. whether someone works) and expenditures (e.g. whether someone has children of school age) to determine ). However, the LFS itself has important limitations. It excludes migrants living in community facilities and some groups may be underrepresented due to non-response to the survey. Income is a critical part of the tax impact calculation, but LFS income information is limited and only includes employee income.

Another important limitation is that the studies depend on assumptions about how migrants use public services. Most studies simply estimate the proportion of migrants in the population and assume that they make the same use of public services as people with similar demographic characteristics (e.g. age and gender). However, migrants have different characteristics to UK-born people and may therefore use public services differently. For example, migrants can access services such as translation services in schools and hospitals that are not normally used by the native-born population. A difficulty in solving this point is that the migration status of the user is not systematically recorded at the time of the delivery of many public services.

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On the other hand, some migrants provide and consume public services. Due to the availability of migrant workers, it may be possible to provide public sector services at lower costs. However, it is very difficult to quantify these contributions as this would require strong assumptions about how public services would have been staffed without migration.

Finally, the tax impact of immigration also depends on the impact of migrants on the tax contributions and use of public services by UK-born people. One example is the impact of immigration on the labor market, specifically whether and to what extent employing migrants leads to more unemployment among domestic workers. Rising unemployment among domestic workers leads to reduced tax revenues and increased consumption of social benefits. Most studies on the tax impact assume that the impact of migrants on domestic work employment is negligible, however empirical evidence from the literature on the employment effects of immigration remains mixed (Migration Advisory Committee 2012, Rowthorn 2008). On the other hand, the presence of migrants can also increase the tax contribution of UK-born people. For example, the presence of low-skilled migrant women working as nannies may allow domestic workers to increase their labor supply, which also increases their tax contributions. These types of indirect effects have been largely absent from previous UK literature.

references

  • Dustmann, C. and Frattini, T. "The Tax Implications of Immigration to the UK." Discussion Paper Series, CDP No. 22/13, Center for Research and Analysis of Migration, Department of Economics, University College London, 2013
  • Dustmann, C. and Frattini, T. "The tax implications of immigration to the United Kingdom." The Economic Journal 124 (2014): F593-F643
  • Migration Watch UK. "An assessment of the tax implications of immigration to the United Kingdom." Migration Watch UK, London, 2014
  • Migration Watch UK. "The Tax Implications of UK Immigration in 2014/15." MigrationWatch UK, London, 2016
  • "International Migration Outlook 2013." OECD, Paris, 2013
  • „Internationaler Migrationsausblick 2021“. OECD Publishing, Paris, 2021.
  • "Financial Sustainability Report 2013." Office for Budget Responsibility, London, 2013
  • „Fiscal Sustainability Report: July 2018“ Office of Budget Responsibility, London, 2018
  • ONS "Analysis of the UK labor market - Estimates of skill mismatch using measures of over- and under-education: 2015" ONS, 2016
  • Oxford Economics. "The Tax Implications of Immigration to the UK" Oxford: Oxford Economics
  • Rowthorn, R. "Large-Scale Immigration: Its Economic and Demographic Implications for the United Kingdom." Civitas, 2014
  • „Income Tax, National Insurance Contributions, Tax Credits and Child Benefit Statistics for Non-UK Nationals: 2018 to 2019“, Januar 2022.

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