Income inequality and international migration are often interrelated and have both become key concerns in Aotearoa New Zealand over recent decades. The present study aimed to examine the effects of immigration on income inequality in Aotearoa New Zealand by decomposing the within-group and between-group contributions to the level of inequality and to the change in income inequality between 2013 and 2018. Drawing on census and administrative income data, we explored two routes (composition effect and group-specific income-distribution effect) through which international migration influences the aggregate income distribution. Mean log deviation (MLD) decomposition technique was used to decompose the within-group inequality and between-group inequality, and the population subgroup decomposition of Mookherjee and Shorrocks’s (1982) approach was used to decompose the change in inequality over the 2013–2018 period. The results show that income inequality was higher among immigrants than among New Zealand-born, and recent immigrants have relatively lower incomes which improve over time. Between 2013 and 2018, increases in the share of the high-skilled immigrant groups had inequality-increasing contributions. The decrease in the population share of low-skilled recent immigrants contributed to decreasing overall income inequality as did the effect of change in group-specific income distribution of low-skilled earlier immigrants. These results highlight the need for more focus on the role of migrant composition in terms of gender, nationality, occupation and migrant status in order to gain greater insight into the relationship between immigration and inequality.