The UK Government is proposing a 6% levy on international student fees to finance the re-introduction of maintenance grants for some students. The idea was trailed in its migration White Paper of June 2025. It has been reaffirmed more recently.
The higher education sector is not always admired by politicians. It is also not well understood. The modern university sector is complex. Part of the activity of the sector still revolves around creating and communicating knowledge for its own sake – the traditional function of a university. As well as being intrinsically important, this process creates graduates better able to think and who are well prepared for the world of work. However, many universities now focus more on vocational qualifications, directly preparing students for life after university – with practical training and work experience embedded in the course. Most courses and most universities are a complex amalgam of these two approaches to higher learning and training.
At the same time, modern universities are both charities and commercial enterprises. And their behaviour – and efficiency – is strongly affected by government regulation and funding, though not generally in a positive way. This includes the public sector equality duty and all the associated initiatives that derive from that. As both charities and commercial enterprises, universities have to cover their costs and make a surplus.
Universities take large numbers of overseas students who pay for their education at market rates. These students are an invisible export – just like selling legal services to the US is an invisible export. Not only that, whilst they are here, overseas students buy lots of other UK produced goods and services that are, in effect, exports too. The fee income alone from overseas students is over £12 billion a year, and the total of invisible exports of the sector is £25bn when the additional purchases by students are taken into account. International students are not just important for the survival of universities, income from them is a positive part of our balance of payments which allows us to buy imports from abroad or invest abroad.
It is into this environment that the Government is proposing its 6% charge on overseas students. We should be clear about this. This is an export tariff. It is a tariff on the export of education services to overseas students. It might be the first such export tariff in the history of our country. I am not sure that even Donald Trump or JD Vance would impose export tariffs on US business.
The first justification made for this levy came from analysis of some of the perceived problems in the migration system that involved students. This is a poor justification. These problems should be tackled at their roots. They will not, in any case, be solved through an export levy (however it is badged). The second justification in the migration White Paper was that many overseas students now attend universities that are not in the world’s top 100. This is even more bizarre. Do we tax the exports of small and medium sized manufacturing enterprises because they are not in the world’s top 100 for their product line?
A further justification was that everybody should benefit from this higher education export industry. This is another strange argument. Should we tax the export of legal services so that everybody benefits from their export? Of course not. We do, of course, tax the wages of employees who provide legal services for export, just as we tax the wages of academic and non-academic staff who work in higher education. These justifications would get a fail in an undergraduate essay in a public policy module of an economics degree.
Whatever the merits of reintroducing maintenance grants, they should not be financed in this way. The UK rarely uses hypothecated taxes, never mind hypothecated export tariffs.
This proposal would be yet another tax on success, to add to VAT on private schools. If you tax things, you get fewer of them. If you tax the provision of education services to foreign students, we will reduce the sector’s invisible exports.
Putting aside the wider economic effects of taxing education services to foreign students, what might be the direct effects on universities? And how might the levy affect services to domestic students?
My own university is a small university with an outstanding reputation for service to students. We would anticipate international student income for 2025/2026 to be of the order of £12.5 million. The levy would therefore be £750,000 in today’s money. Universities UK has calculated the impact across higher education would be over £600m. This is either absorbed from current revenue, or fees would rise – though the latter is unlikely in an internationally competitive market. There will simply be further teaching and operations cost reductions. A new and discriminatory tax burden and a continually increasing regulatory burden are likely to detract from student experience with larger class sizes and lower spending on student welfare.
Small universities such as St. Mary’s University – where I teach – and the University of Buckingham can provide a better environment for students to flourish in. But they already struggle with regulatory overheads. Loading on more costs is likely to lead to the creation of more mega universities in order to gain economies of scale. Many universities already lose money on domestic fees. The loss of the cross subsidy from international students will benefit neither home nor overseas students and it will certainly not benefit the economy at large.
Indeed, the irony of all this is that the measure will put more financial strain on universities and that will increase the pressure for more government support. Perhaps the Government will choose to bail out failed universities. If this happens, we will have levied a tariff on the export of education services and then have to increase domestic taxes to pay for the bailing out of institutions that lose money as a result of the policy. Government policy often leads to winners and losers. In this case, there are unlikely to be any winners at all.
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