The number of UK companies facing “critical” financial distress has leaped by more than 20% to nearly 50,000 over the past year as rising taxes and slow growth have hammered profitability.
In the second quarter of the year 49,309 businesses were classified in the “critical “ category, up from 40,613 in the same quarter last year and 9% on the first quarter of 2025, according to the latest “Red Flag Alert” report from insolvency specialists Begbies Traynor.
Of the 22 sectors covered by the survey, all experienced an increase in ‘critical’ financial distress compared with last year, as economic pressures impacted every corner of the economy.
Predictably some of the biggest increases in “critical” distress were seen in sectors most badly hit by the rise in employer National Insurance contributions in April with bars and restaurants seeing a 41.7% surge, travel and tourism up 39% and general retailers with a 17.8% rise.
The number of companies in the next most serious category of financial distress, “significant” also rose, but less sharply by 10/8% year on year to 666,876 businesses.
London had by far the most companies in distress of any UK region. The number categorised as “critical” was 17,194 while 197,975 were classified at “serious.”
Julie Palmer, Partner at Begbies Traynor, said: “Financial distress has intensified over the past twelve months in every corner of the economy. This means businesses across the UK are facing significant headwinds and many will have to review where they can tighten their budgets or restructure to give themselves more stability in the immediate future.
“This time last year, there was a degree of optimism amongst business leaders who were hoping to see a shift in fortunes in the second half of the year, but fast-forward 12 months and confidence is in short supply.
“Households are still grappling with their finances, and this is keeping consumer confidence volatile. The knock-on effect of this is clear to see in the consumer-facing sectors where margins are thin, growth is hard to come by, and the impact of higher employee costs is pushing many businesses to the brink of collapse.
“So, it is of no surprise to me that while larger pub groups might be performing well, by squeezing out extra efficiencies to counteract onerous price rises, many independent players won’t have the scale to withstand the pressures of this environment for another 12 months if nothing improves.
Ric Traynor, Executive Chairman of Begbies Traynor, said:
“The sharp rise in critical distress underscores just how tough the economic environment is for UK businesses and it’s abundantly clear that tens of thousands of firms are struggling to stay afloat.
“Small and medium sized businesses across the UK are being put under immense strain by the recent increases to employer’s NI as well as the increase to the national minimum wage. With limited financial headroom to absorb rising costs, many businesses are now reaching a tipping point.
This article was written by Jonathan Prynn from The Evening Standard and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.