The Margin Myth

The Institute of Economic Affairs commissioned Freshwater Strategy to ask a representative sample of British adults a single question across eleven sectors of the economy: What do you think is the average profit margin in this industry? Respondents were given a slider running from zero to one hundred per cent. They were not asked about a specific company, a particular year, or a peak market moment. They were asked for the average. They answered as if every UK business was a Silicon Valley software company at a stock-price high.

The public's estimate of the average UK company's net profit margin is 43%. The actual figure, across all listed UK companies and the broader corporate population, sits around 9-10%. The public guess is more than four times the reality. In some sectors it is closer to ten times. The pattern is not random noise. The sectors the public most dislikes, or most interacts with as a customer, attract the widest overestimates.

Eleven sectors. One pattern.

Run the chart sector by sector and the gap between perception and reality is consistent enough to look intentional. Energy companies, the headline target of every "windfall" debate since 2022, are estimated at 57% net profit on every pound of revenue. The published average across British Gas, EDF and the integrated majors is between 5 and 15%, depending on where you draw the line between upstream, midstream and supply. Supermarkets, on margin for being the second most disliked sector, are estimated at 50%. Tesco's actual operating margin is around 4.3%. Sainsbury's sits at 3%. Morrisons made 1.4% the year before its private-equity takeover. Hospitality, estimated at 40%, is the industry where one in six pubs has closed in the last fifteen years. The British Beer & Pub Association puts the typical operator's net margin at 3 to 8%.

The most arresting line on the chart is the NHS. The British public, in aggregate, believes the National Health Service makes a 34% profit margin. The NHS is not a corporation. It does not have shareholders. It does not retain earnings. It does not, in any accounting sense, make a profit at all. A third of respondents who answered the question on the NHS were not estimating a real number. They were registering a feeling.

The chart's bottom-of-class performers are equally revealing. Rail transport is on a 1-5% margin and a 45% public estimate, against a backdrop of fare protests and franchise-failure headlines. Airports & airlines, an industry where the typical full-service carrier was technically insolvent at the depth of the pandemic, registers as a 50% margin in the public mind. Clothing & fashion, in which Primark famously runs at single-digit margins and the high street is closing at 38 shops a day, is at 3-10% actual against 47% perceived.

The X reaction proved the X reaction

The IEA put the chart on X this week. The replies under it produced exactly the behaviour the survey was measuring. A first wave of users insisted the actual numbers must be wrong, that "the books" were being cooked, that the IEA was a corporate front. A second wave skipped the data and restated the original perception with stronger language: energy companies were "absolute crooks", supermarkets were "fleecing pensioners", landlords and water companies were running organised crime under regulatory cover. A third wave defaulted to "well it's not the margin that matters, it's the absolute profits", which is a fair point about scale but a different argument from the one the chart was making.

Almost nobody replied with a counter-figure backed by a company filing. The respondents who had estimated supermarket margins at 50% in a survey were now estimating them at 50% in a comment thread, having been shown that the real number is 3%. The intuition is fixed. Evidence does not move it.

Survey shows public guesses margins 4 to 10 times too high. Public replies, without irony, that the survey must be wrong.

The greedy actor in the chart is not on the chart

The reason the actual margins are so low is not that the companies are hiding the rest. It is that the state has already taken its share before the company calculates a margin at all. On a £10 standard-rated supermarket basket, VAT removes £1.66 before Tesco's till has finished beeping. On a £6 pint, alcohol duty plus VAT take roughly £2.50 before the publican touches a coin. On every employee, the firm hands over 15% employer NI on pay above £5,000 — raised from 13.8% in April 2025. On every commercial premises, business rates are levied at around half of rateable value, owed whether the business made a profit that year or not. On every litre of diesel, 86p in the pump price is duty plus VAT. On every wage, employee NI and income tax run from £12,570 a year, with the threshold frozen until 2031.

Then, after all of that, corporation tax takes 25% of what's left. Then the owner pays income tax and dividend tax on what they extract. The 3% the supermarket keeps and the 5% the pub keeps is the residual after layer upon layer of state extraction, much of it taken regardless of whether the business made any profit at all. A pub that loses money still pays business rates. A supermarket that breaks even still collects VAT on every sale and hands it on. An employer hiring at minimum wage still adds 15% NI on top before the worker sees a penny.

The public response to a 3% margin is to assume concealment. The arithmetic answer is that the lion's share was already taken before profit was calculated. The "greedy corporate" framing of 2022-24 was the most effective political deflection of the last decade. While the public was being directed to look at the 3%, the duty on every pint, the 86p on every litre of diesel, the £26 billion annual business rates take, the £250,000 lifetime NI bill and the rising employer NI all continued without serious public scrutiny. The actor doing the taking set the terms of the debate about who was doing the taking.

Why the gap costs the country money

Margin misperception is not a curiosity. It is the foundation on which a recurring set of policy choices is built. Windfall taxes on energy producers are politically free because the electorate believes the sector keeps half of every pound. Price caps on water, broadband and energy retail are popular because the regulated entities are assumed to be sitting on enormous discretionary margin. "Greedflation" framing of the 2022-24 inflation shock survived contact with the published company accounts because the framing matched the intuition and the accounts did not.

The policy response that follows from a 43% margin assumption is not the policy response that fits a 9% margin reality. A 43% sector can absorb a windfall tax, a price cap, a regulatory ratchet and a hostile media cycle without flinching. A 9% sector cannot. The 2024 closure rates for pubs, the 2024 retail-shop closure rate of 38 per day, and the rolling consolidation across UK supermarkets and energy supply are what the policy regime looks like when it is calibrated to perception rather than to balance sheets. Investment is the first thing to leave a low-margin sector that is treated like a high-margin one: the UK's listed-company population has shrunk by around 25% over the last decade, and London IPO volumes in 2024 were the lowest since records began.

The gap is in the room, not in the books

Some of the gap is explained by the public conflating margin with markup, or with gross profit before costs, or with the salaries paid at the very top of the firm. Some is explained by visible price rises in groceries, energy and rail being read directly as visible profit. Most of it, on the evidence of the replies, is a fixed prior that no chart will dislodge.

The companies on the chart are not concealing 40-percentage-point margins. There is no fraud large enough to close the gap between 9% and 43%. The gap is in the room with the slider, not in the books. The 9% is what's left after the state has finished. Until the British public looks at a 3% supermarket margin and asks the next question — where did the other 97p go? — the policy regime will keep producing the outcomes a 43% economy could absorb and a 9% economy cannot. The greedy actor in the chart is not on the chart. It set the chart up, and it cashes the cheque on every line.