Illegal immigrants will be able to avoid detention while awaiting deportation by paying a bail bond and agreeing to be tagged, in the most sweeping changes to immigration rules for 37 years.

Migrants would hand over the cash to the authorities as a guarantee they would not disappear while their cases are being decided, the Government announced yesterday.

The bail bond, which will also require the migrant to be tagged and live at an approved address, would be held by the Home Secretary and forfeited if bail is breached.

The measure, if adopted widely, will ease pressure on space in immigration removal centres and is a much cheaper option than holding illegal immigrants in custody.

Yesterday’s draft immigration and citizenship bill also outlined plans to allow migrants who are deported from the UK for a set period to re-enter if they agree to refund the cost of their departure. Deportation can cost as much as £11,000 per case.

A new fund to help pay for public services, including education and healthcare, in areas where there has been an influx of migrants is also to be created from fees for people applying to become British citizens.

Top-up levies will be paid at a rate of £20 per head at each of the three stages towards full citizenship, the Home Office said.

Ministers also want more UK border controls operated by immigration officers to be placed overseas so that travellers’ documents can be checked before they arrive on British shores. At present, such controls operate only in Belgium and France.

As the draft Bill was published, the Home Office confirmed it will retain the ancestral route to citizenship under which Commonwealth citizens aged over 17 with one grandparent born in the UK can obtain a passport.

Jacqui Smith, the Home Secretary, said: “In recent months we have listened to people across Britain and the message is clear - they want those who want to make Britain their home to speak English, to work hard, and to earn the right to stay here.”

She added: “We are making the biggest changes to our immigration system for a generation, and part of that is making sure those who stay in the UK make a positive impact on their local community.”

The draft Bill includes proposals outlined earlier in the year, setting out how foreigners convicted of minor crimes will have to serve three years’ probationary period on top of a six-year qualifying period before gaining citizenship.

A foreigner convicted of an imprisonable offence will, as a rule, be barred from UK citizenship and would face automatic deportation.

The new route to citizenship will be five years as a temporary resident before applying to be a probationary citizen - a period lasting between one and five years - and then being given full citizenship.

Migrants who take part in community work such as voluntary work and charity fundraising, would only have to serve the five-year minimum period plus twelve months on probation before getting a UK passport.

Migrants in temporary residence and probationary citizenship categories will be barred from claiming mainstream benefits including housing, homelessness benefit and social assistance.

However, they will be required to send their children to school where they will be educated free of charge.

The restrictions on benefits do not apply to EU citizens seeking to get a UK passport.

A paper published alongside the plans suggested that changes are to be considered to rules giving Irish citizens free movement of travel between the Republic and Britain.

At present, the “common travel area” allows free travel between Ireland and the UK with no requirement to show passports, as well as between the UK and the Isle of Man and the Channel Islands.

“The principle of movement without controls regardless of nationality in the area is out of date,” the document said. However, Home Office sources suggested later that any changes to the common travel area would be minimal.

A full Bill setting out the proposals is expected to be published in the next session of Parliament.

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