What would a flat 20% income tax actually do?
Stop suffocating
the people who
build things.
The usual answer is “lose hundreds of billions”. Follow the money all the way round the economy and a different picture appears: owners stop hoarding, workers get hired and paid more, everyone gets more businesses competing for their custom, and the Treasury still takes a slice every time the money turns.
One big assumption runs through all of this: that once taking money out of a company is taxed at only 20%, owners stop deliberately leaving large piles of surplus cash inside their companies. If that’s wrong, the numbers below are too generous. If it’s right, the picture changes a lot.
Part 1 of 2
The arithmetic
We wouldn’t lose £360bn. We’d lose about £60bn.
The UK collects around £359.6bn of income tax a year. But the basic rate is already 20%. A flat 20% only removes the extra money raised by the 40% and 45% bands (plus some Scottish rates and dividend rules).
All income tax, 2026–27 forecast
£359.6bn
£55–65bn
a year, before any behaviour changes
Cutting the 40% rate to 20%
≈ £43bn
HMRC says each 1p on the 40% rate is worth about £2.15bn. Twenty of them: £43bn.
Cutting the 45% rate to 20%
≈ £8.4bn
Each 1p off the 45% rate costs about £335m. Twenty-five of them: £8.4bn.
Sources: Office for Budget Responsibility (OBR) forecast of 2026–27 receipts; HMRC’s “ready reckoner” (its published estimate of what each 1p change in a tax rate is worth), 2027–28 values. HMRC’s figures already include some behaviour change; very large changes are more uncertain.
Hundreds of billions are sitting in companies. Not because it’s useful there, but because taking it out costs too much.
Around 1.85 million UK companies are run by their owners. When the owner would pay 40–45% to pay themselves, many simply leave the profit inside the company and let it pile up.
1 in 2
owner-managers earning about £150k a year leave more than £50,000 in the company every year
1 in 4
leave more than £90,000 a year
£24.4bn
added to UK business bank deposits in June 2026 alone
The crucial finding: the Institute for Fiscal Studies (IFS) found this tax-motivated hoarding does not turn into extra investment in the business. It mostly sits as cash and financial assets, doing very little.
Working assumption for the rest of this explainer
£150–300bn of accumulated capital that owners would take out fairly quickly if the price of doing so were only 20%.
Sources: HMRC-commissioned research on owner-managed companies; IFS analysis of owner-manager retention; Bank of England money and credit data, June 2026.
Follow £100 round the economy. The government doesn’t tax it once. It taxes it again and again.
Today the £100 sits in the company and almost nobody taxes anything. Take it out at 20% and it starts moving, and every time it changes hands a slice goes to HMRC.
Every turn of the loop is a taxable event
Money out of the company: income tax. Money spent: VAT. Money earned by the shop or the builder: corporation tax on the profit, income tax and National Insurance (NI) on the wages. Money spent by their staff: round again. Each lap is smaller, because some leaks out to savings, imports and debt. But a single pound is taxed several times before it comes to rest.
Today, by contrast, the £100 stays in the company as cash, government bonds or shares. Nobody is hired with it, and HMRC collects next to nothing on it. The same pound, standing still.
Step
What happens to the money
What HMRC collects
£100 leaves the company
The owner pays 20% to take it out and keeps £80.
The owner spends or invests most of it
Say 70%, which is £56, goes into Britain: a kitchen, a car, a holiday in Cornwall, a stake in a friend’s start-up, a new hire. The rest is saved, spent abroad or used to pay off debt.
20% VAT works out at about 16.7p of every £1 on the till receipt, because the price already includes it.
That £56 becomes someone else’s income
The builder, the restaurant, the garage use it for wages, suppliers, rent and, if things go well, profit.
The staff and suppliers spend their share
At Tesco, the pub, the dentist. Each of those businesses pays wages and suppliers and makes profit, and round it goes again, a little smaller each time.
…and round again
It doesn’t go on forever. Each loop, some money leaks out: into savings, imports, debt repayment and tax itself. So the circle shrinks.
Several slices, each small. Together, a lot more than 20p.
What if £200bn came out of companies?
Same story, bigger numbers. Here is the £200bn as it moves, and what reaches HMRC along the way.
Owners take out £200bn
£200bn
70% of that is spent or invested in Britain
£112bn
Round the loop it grows by about 1.2× as it becomes wages, profits and further spending
£134bn
HMRC captures roughly 30% of that activity through VAT, corporation tax, income tax, NI, rates and duties
+ £40bn
Total reaching HMRC from a £200bn release
≈ £80bn
£40bn at the door + about £40bn as it circulates
Cost of the tax cut, one year
£55–65bn
So during the release the Treasury could be £15–25bn ahead. At £300bn released, the same sums give about £121bn.
Spread over the few years it takes the money to come out and move around. The 70% / 1.2× / 30% figures are deliberate, strong-but-coherent assumptions, not forecasts.
You can only release the pile once. But nobody builds a new one.
Companies keep making profit, and with a 20% exit price there is no reason to hoard it. Suppose an extra £60bn a year is paid out instead of stored.
20% at the door
+ £12bn
a year
As the £48bn moves round the economy
+ £12bn
a year
Permanent anti-hoarding effect
≈ £24bn
a year, every year
The yearly hole, before and after
How much bigger would the economy need to be?
Cutting the top rate from 45% to 20% changes what people do: work more, start things, hire, stay in Britain, move here, declare income rather than hide it. That is hard to model, so here is the hurdle, not a prediction.
UK GDP, 2026–27
≈ £3.17 trillion
So a permanent 1% bigger economy is about £32bn more output.
Tax on every extra 1% of GDP
≈ £10bn a year
Using a cautious 30% take (the overall ratio is about 37%, but income tax has just been cut).
Money coming back to HMRC each year, by how much bigger the economy ends up
£bn a year · £24bn from anti-hoarding plus about £10bn per 1% of extra GDP · shaded band = the £55–65bn static cost
| Economy bigger by | Anti-hoarding | Growth tax | Total per year |
|---|---|---|---|
| 1% | £24bn | £10bn | £34bn |
| 2% | £24bn | £19bn | £43bn |
| 3% | £24bn | £29bn | £53bn |
| 4% | £24bn | £38bn | £62bn |
If the economy ends up 3–4% larger than it otherwise would have been (not 3–4% faster every year, just 3–4% bigger a decade on) the flat 20% rate roughly pays for itself.
At 1% it doesn’t. At 2% the remaining gap is modest. At 4%+ the Treasury could collect more than today, despite the far lower rate.
Part 2 of 2
The knock-on effects
The sums are the smaller half of the story. Economic activity feeds on itself: when hundreds of billions leave passive company balances and get spent, invested or used to start businesses, the effect doesn’t stop with whoever first receives the money. It spreads through wages, new businesses, competition and investment. That is where everyone starts to do better.
← Back to the arithmeticMore spending means businesses need more people. And they compete for them with pay.
Give households tens of billions more to spend, on restaurants, builders, cars, kitchens, holidays, childcare, software, and businesses first use their spare capacity. Then they need more staff, more hours, more kit and more suppliers. When several firms want the same workers, the main way they compete is higher wages. So part of the benefit moves from owners to ordinary employees.
+£3,000
A restaurant making more money has to pay its chefs more to keep them.
Pay rise
A builder with a fuller order book raises wages so the crew doesn’t walk to a rival.
5 rivals
A software firm lifts salaries because five other expanding firms want the same engineers.
A £35,000 salary becomes £40,000
The worker gets another £5,000. Some of it goes straight back in income tax and NI; the employer pays more NI too; most of the rest gets spent, which means VAT, and revenue for the next business along. Higher wages don’t just make people better off. They rebuild the tax base.
Workers get options too
When firms are expanding and short of people, someone leaves a £30,000 job for £35,000. The old employer has to offer £33,000 to replace them. A third firm raises pay so its staff aren’t poached. That is how growth reaches pay packets.
The old approach
Tax the existing economy more heavily.
This approach
Make the taxable economy considerably larger.
“Won’t this just push prices up?” Only if nobody responds. Somebody always does.
Say restaurants become noticeably more profitable because people have more to spend. Other people notice. Someone opens another restaurant. Then another. The first one can no longer simply raise prices and pocket the extra: it has competition. The extra demand has created extra supply.
What competition for the same customers produces
The builders test. If everyone wanted more builders tomorrow and Britain had exactly the same number of builders, at first we’d mostly get dearer building. But higher prices and profits are a signal (there is money to be made here), and people train as builders, firms expand, workers arrive, prefabrication and new methods get adopted, new firms start. Supply responds. A pure stimulus only adds demand; this kind of reform aims to add demand and supply, so more of the boost becomes real output rather than inflation.
What £1bn of extra demand does to a sector
- 1Existing firms sell more; profits rise.
- 2They add hours, then hire; wages rise; suppliers get bigger orders and hire too.
- 3Entrepreneurs notice the returns; new firms enter; incumbents invest to defend their share.
- 4Banks lend into a growing industry; investors back the newcomers; capacity expands.
- 5Competition pulls margins back to normal, but the industry now makes £11–12bn a year instead of £10bn.
The economy has actually become larger. That matters far more than the original short-term boost.
And competition breeds productivity
Ten firms fighting for a bigger market: one automates part of its work, one writes better software, one reorganises its supply chain, one buys machinery, one runs with fewer admin staff, one launches a new product. The sector ends up producing more from roughly the same people and kit. Productivity growth is what lets real wages rise for good, not a one-off sugar rush.
At 20%, more people start things, grow things, and put their money back to work.
Lower personal tax changes the payoff from five hard years building a company, and from every expansion, every first hire, every cheque written to someone else’s start-up.
Starting up
Most new companies stay small. But the outcomes are wildly skewed: every so often one ends up employing 100, 1,000 or 10,000 people, all paying tax, with suppliers and shareholders spending in turn. Even a small rise in business formation compounds.
Expanding
An owner on £200,000 could earn £100,000 more by expanding, with all the hiring, borrowing, stress and risk that involves. When the state takes a very large share of the upside and the owner bears the downside, marginal expansions don’t happen. At 20%, a firm of 5 becomes 10; 50 becomes 100. Across millions of businesses, that adds up.
Recycling capital
Today a founder sells up and leaves £10m in a holding company, not to spend it, but because taking it out costs too much. At 20%: out it comes, tax paid, and £500k goes into each of ten start-ups. Eight fail. One becomes worth £100m and employs hundreds. The point isn’t the Lamborghini; it is taking tax out of the decision about where money goes.
Coming to Britain
A founder choosing between London, Dubai, Singapore, Switzerland and New York sees a 20% top rate very differently from 45%. So do engineers, doctors, traders, executives, investors. The ones who come don’t just pay income tax. They rent or buy homes, hire people, start companies, fund start-ups, eat out.
The Treasury doesn’t win its money back from the original rich person. It wins it back from everything their money sets in motion.
1
20% rate → company money comes out → households have capital → they spend and invest
2
Businesses take more revenue, make more profit + corporation tax, hire, and raise wages + income tax & NI
3
Households spend the higher wages + VAT → suppliers expand → more jobs
4
New businesses enter → more investment → more productive capacity
5
Competition drives productivity → higher real wages → still more spending and receipts
6
A bigger economy → a larger tax base: VAT, corporation tax, NI, property taxes, duties, and income tax itself, despite the lower rate
And even if it didn’t fully pay for itself: suppose, after everyone has responded, the reform still costs the government £15bn a year, but the economy is £100bn bigger, with more investment, higher wages, thousands more businesses and more competition. That is still a very successful policy. The honest test isn’t “does every lost pound come back to the Treasury?” It is “does the country end up richer enough to justify it?”
The verdict
A smaller slice.
Of many more slices.
Put the two halves together and the government is making a deliberate trade:
Give up
A very high percentage of a smaller, more tax-distorted economy
In exchange for
A smaller percentage of a much larger, faster-moving, more competitive economy
Whether it works comes down to whether it sets off, and sustains, this cycle
The wrong comparison
“Income tax raises £360bn. Growth can’t replace that.”
True, and beside the point. Most of that money is already taxed at 20% and carries on being taxed at 20%.
The right comparison
A £55–65bn cut, against £15–30bn a year of money released and recirculated, plus about £10bn for every 1% of extra GDP.
Break-even: an economy 2.5–4% bigger in the long run. Hard, but not absurd.
Who ends up better off
Owners
stop being squeezed. They keep 80p in the pound, not 55p, so they build, hire and take risks instead of hoarding.
Workers
get hired and paid more as that money chases staff, skills and suppliers.
Everyone
spends more, which means more businesses and more competition for your custom: better prices, better service, more choice.
Treasury
takes a smaller slice each time, of many more transactions, and of a bigger economy.
What has to be true for this to work
The money really is trapped. Owners are holding £150–300bn back because of the tax, and would release it at 20%.
It gets spent here. Most of it goes into British businesses and hiring, not offshore or under the mattress.
The economy has room. If it’s already at capacity, the Bank of England may lean against the extra demand.
Illustrative arithmetic built on OBR, HMRC ready-reckoner, IFS and Bank of England figures. None of the scenario numbers (70%, 1.2×, 30%, £200bn, £60bn/yr) is a forecast. They are the assumptions you need to believe.