Government could use taxation to restrict immigration

by Philip Shirley | 02.08.2016

The government will have to find ways of restricting immigration that deliver on the expectations of those that voted for Brexit, but at the same time are not administratively complex for business and do not upset our European neighbours.

The government has been committed to helping the poor and it has done so by encouraging the poor to work rather than live on welfare. However, in helping the poor to earn, the government has made the UK labour market more attractive to foreigners.

A central plank of Conservative policy has been to take people out of tax. The personal allowance has been raised from £6,475 in 2008/09 to £11,000 in the current year. Furthermore, the personal allowance has been removed for those earning more than £100,000 a year.

Non-UK residents, who are citizens of EEA states, are entitled to a personal allowance and this allows residents in other EU countries to work temporarily in the UK without paying tax.  This goes further than other EU states and the government would be entitled to remove the personal allowance from non-UK residents.

The government could go further and remove the personal allowance for new residents in the UK for a period of time.  For example, a person who comes in the UK would not receive a personal allowance for say five years.  Those who have left the UK and are returning to the UK could be entitled to the personal allowance if they have been resident in the UK for five years at some earlier time.

This would not prevent a person from coming to the UK, but it would mean that he would pay UK tax at a minimum of 20% on all his earnings and reduce the incentive for him to come.  

Somebody earning £10,000 would pay tax of £2,000 and have take home pay (ignoring national insurance contributions) of £8,000. The relative impact of the abolition diminishes the more a person earns and has no impact on those earning so much that they do not get the personal allowance.

Such a change would be fairly easy to administer through the tax system. It would not prevent foreign workers from coming to the UK, but would have an economic impact on what they earn from the UK.  It would favour indigenous low earning UK people who are being priced out of jobs by foreigners.

What is peculiar is that the UK should not need to come out of the EU to make this change.   Tax is a UK matter and not a EU matter. Unlike benefits, it is not expressly dealt with in the treaty.  Entitlement to the allowance would be denied by reference to residence rather than nationality.  It might be attacked on the grounds of indirect discrimination, but special situations such as on the Irish border where people live outside the UK and have permanent jobs in the UK could be dealt with.

It is usually overlooked that the EU Treaty allows exceptions to freedom of movement of labour on grounds of “public policy” as well as public security.  Public policy is a vague term which is not properly understood and there is a tendency in the UK legal tradition to interpret such provisions restrictively. Freedom of movement of labour does expose indigenous people to competition in the labour market and protecting the interests of those least able to earn must be a matter of legitimate public policy.

Philip Shirley is the founder of PE Shirley, a firm of chartered accountants providing specialist tax related advice.

Edited by Hugo Dixon

2 Responses to “Government could use taxation to restrict immigration”

  • How would this proposal be easy to administer? Someone (HMRC or the individual) needs to decide when each individual becomes resident in the UK. Is that period of residence counted from the day the person enters the UK (using what records?) , or from the beginning of a tax year?

    Would the statutory residence test for tax be used to decide if someone was resident for a particular tax year? If so, that test can only be applied retrospectively by counting the number of days the person was physically in the UK and alsoby looking at the number of ties the individual has to the UK.

    Before the residence of an individual can be determined he/she would be denied the personal allowance. The individual would have to claim the allowance later and receive a tax refund – lots of extra adminstration for HMRC.

  • Rather than penalise the worker directly by charging more tax (and thus reducing their take home pay) why not push the disincentive onto the employer?

    The simplest would be to increase the employer NI contributions for new arrivals (however defined).

    For example

    Mr X earns £24k, his take home pay is in the region of £20k with £4k being paid by Mr X to the gov in tax and NI.

    However Mr X’s employer also has to pay around 11% (another £2.5k) to the government. That means, Mr X costs his employer around £26.5k a year.

    If a new arrival had the employer contribution set to (say) 20% then the same £24k worker would take home the same £20k but cost their employer £29k.

    To be legal, the higher NI contribution would be applied to everyone who is “newly arrived” returning UK citizens and EU immigrants.

    The change would easy to administer via tax codes.

    It would weaken the argument about new arrivals being a drain on the country as they provide more tax than an established workers, it would not harm the new arrival’s take home, it would prevent the “take our jobs” argument (if you lose your job to someone who costs your employer more than you, you’re probably not very good at your job).

    The only effect would be on the “demand” for immigrant workers. If there is less demand for them, less will come.

    There would have to be some steps to close the loop hole on the self employed. Maybe as a self employed person you have to pay the “employers” contribution on your earnings but not your own until they had passed the “new arrivals” stage.