Highlights:
The latest Red Flag Alert research from Begbies Traynor, has revealed a considerable 43.8% year-on-year increase in ‘critical’ financial distress in Q4 2025.
Throughout 2025, UK businesses continued to grapple with a prolonged period of economic uncertainty, rising operating costs, driven by inflation and higher wages, increased tax burdens, elevated interest rates, and weakened consumer demand. The persistence of these pressures into 2026 is increasing the possibility that tens of thousands of ‘zombie’ companies will fail.
As of 31 December 2025, 67,369 companies were in ‘critical’ financial distress, a 21.3% rise on the previous quarter (Q3 2025: 55,530). Notably, this rise in ‘critical’ distress was widespread, with all of the 22 sectors monitored by Red Flag Alert reporting a deterioration in financial health when compared to the same period last year.
Consumer-facing industries, which are heavily reliant on discretionary spending, have been particularly badly affected following weaker than expected consumer spending during the crucial ‘Golden Quarter’ over Christmas last year. Leisure & Cultural Activities (+59.1%), Hotels & Accommodation (+53.7%) and Bars & Restaurants (+39.0%) saw some of the steepest increases in ‘critical’ financial distress over the last 12 months.
Meanwhile, the number of businesses in ‘significant’ financial distress continued to climb in 20 out of 22 sectors tracked by Red Flag Alert in 2025, albeit at a slower rate than previously experienced. There was an 11.3% year-on-year increase to 728,640 firms (Q3 2024: 654,765), following just a 0.3% increase from 726,594 in Q3 2025. In 2025, the highest annual increases were seen in the Real Estate & Property (+23.5%), Utilities (+17.8%) and Leisure & Cultural Activities (+14.2%) sectors.
Julie Palmer, Partner at Begbies Traynor, said:
“During the crucial final quarter of 2025, the UK economy continued to experience subdued levels of consumer confidence. This has had a painful impact on the hospitality, retail and housing sectors, which have been under considerable pressure for some time.
“Whilst there have been some winners amongst the larger, household name, businesses during the Golden Quarter, our research shows that smaller businesses up and down the country are starting the new year with some very difficult choices ahead, as the weight of slower spending and increased running costs bring them to near breaking point.
“This highly challenging trading environment has created a growing number of ‘zombie’ businesses which are likely to fail unless they can attract new investment or be acquired by more agile companies. While many of these organisations have struggled along for years, we see a new catalyst in 2026 that could push some over the edge, as HMRC starts to call in some of the £27bn in overdue Corporation Tax, PAYE and VAT following the pandemic.
“During 2026, I expect to see more businesses enter formal insolvency, further increasing unemployment, and meaning it will become ever more critical for businesses that survive to create new jobs and opportunities. Over the years, there have been many tipping points for zombie companies, but the heightened level of critical distress combined with weak consumer spending, compounding cost inflation and action from HMRC, could mark another milestone.”
Ric Traynor, Executive Chairman of Begbies Traynor, said:
“The continued rise in critical financial distress is clearly concerning for the UK economy. Last year was not easy for UK businesses, and the start of 2026 suggests there is no relief in sight, with the macro-economic environment scarred by geopolitical uncertainty and trade policies.
“Domestically, an increasing employer tax burden, combined with faltering consumer confidence, rising unemployment and still high interest rates, have added further pressures to the shoulders of business leaders. It is a complex and difficult landscape for every business right now, but I fear it is becoming increasingly obvious that some sectors are more vulnerable than others.
“Sectors including construction, hospitality and retail have had a tough year in 2025. So, as we start 2026, they will be hoping for some degree of certainty around the obstacles ahead. It will be critical that there are no more surprises from the Government.
“Sadly, many may not see a viable way forward without a drastic change to the macro-economic backdrop. This will create opportunities for the few businesses, which have the right management teams, strategy and resources to take market share, at the expense of the many that we expect to see fall away.”
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