How Falling Net Migration Could Weigh on UK Tax Revenues and the Budget

11th January 2026

Fewer people entering the workforce means less tax income.

Immigration especially of working-age people boosts the size of the labour force.

That, in turn:

increases income tax and National Insurance contributions,

expands the number of people spending money and paying VAT,

and supports corporation tax revenues through economic activity.

The UK's official budget forecaster, the Office for Budget Responsibility (OBR), has regularly modelled the fiscal impact of migration in its economic forecasts. Under its scenarios, higher net migration adds billions to tax receipts, reducing public borrowing and easing fiscal pressure over time.

In contrast, a lower net migration scenario — such as the one being pursued by the Government — means fewer workers coming in, less tax being collected, and more pressure on the public finances. Specifically, in modelling where net migration is 200,000 a year lower than a central forecast, borrowing could be around £20 billion higher by the end of the decade, and public debt higher as a share of GDP.

Recent forecasts point to a potential revenue shortfall

Some external analysis suggests that a large collapse in net migration could create a substantial gap in Treasury forecasts, potentially forcing the Chancellor to rethink tax policy. Reports indicate:

Net migration could fall to zero or even negative levels, reducing expected tax receipts sharply.

The OBR's central assumptions for future net migration have already been challenged by these downward trends, meaning planned revenues may be higher than what comes in.

This matters because the UK Budget is fundamentally built on forecasts of how much tax the government will collect. A sustained drop in the working-age population from migration means less income tax and national insurance overall — and either cuts to spending or higher taxes on the existing population to fill the gap.

Ageing population dynamics compound the issue

Even beyond net migration, the UK is facing demographic headwinds: births are declining and deaths may soon outnumber births — a shift that worsens the ratio of working-age taxpayers to retirees. This increases the dependency burden on public services and pensions, meaning more public spending at the same time as revenues are constrained.

When combined with reduced net migration, this demographic squeeze intensifies fiscal pressure on the government's budget, making it harder to balance spending and tax without raising rates or broadening the tax base.

What this could mean for tax policy

If fewer migrants mean lower-than-expected tax receipts, the Chancellor faces a tough choice in upcoming budgets:

Raise taxes on the domestic population to compensate (e.g., higher income tax, VAT, NICs);

Cut public spending in areas such as health, education or local government grants;

Borrow more, which adds to debt costs and could breach fiscal targets.

Some commentators are already warning that a sizeable net migration drop could force additional tax rises in future Budgets — beyond what has already been announced.

The longer-term picture

Migrants tend to contribute net tax revenue over time, especially working-age migrants on skilled visas who pay into the system.

The exact fiscal effect depends on the types of migration (work vs. study vs. family vs. humanitarian) and how spending pressures evolve.

Nevertheless, shrinking net migration reduces one of the built-in growth levers for tax receipts at a time when other pressures — public service demand, ageing population, debt interest — are rising.

The government’s push to sharply cut net migration carries a hidden fiscal cost. Fewer working-age people means fewer taxpayers — less income tax, less national insurance and weaker VAT receipts — at a time when spending pressures are rising.

The UK’s official forecasters have been clear: lower migration leads to higher borrowing and a tougher budget outlook. Unless spending is cut further, that shortfall doesn’t disappear it gets filled by higher taxes on the people already here. In short, a smaller workforce makes future tax rises more, not less, likely.