Thousands of UK businesses at ‘critical’ tipping point

Thousands of UK businesses at ‘critical’ tipping point

‘Zombie’ businesses near collapse as critical financial distress increases and gap between companies thriving or surviving widens

Highlights:

• In Q4 2025, the number of businesses in ‘critical’ financial distress surged 43.8% year-on-year, with 67,369 companies now affected (Q4 2024: 46,853), and a 21.3% increase on Q3 2025
• All 22 industries monitored by Red Flag Alert experienced a double-digit percentage increase in ‘critical’ financial distress versus the same period last year
• Consumer-facing industries remain under severe pressure, with Leisure & Cultural Activities (+59.1%), Hotels & Accommodation (+53.7%) and Bars & Restaurants (+39.0%) showing the highest increases in ‘critical’ financial distress
• ‘Significant’ financial distress increased 11.3% year-on-year to 728,640 firms (Q4 2024: 654,765); this slowed to an increase of just 0.3% in the final quarter of 2025 (Q3 2025: 726,594)
• Real Estate & Property Services (+23.5%) and Leisure and Cultural Activities (+14.2%) experienced some of the highest increases of ‘significant’ financial distress in the quarter

The latest Red Flag Alert research from BTG 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 BTG 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 BTG 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.”

-- ENDS --

For further information, contact:

Ian Stanley

Ian.Stanley@btguk.com

Gideon Casey

Gideon.Casey@btguk.com

Notes to Editors

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004. It has become a benchmark on the underlying health of companies across every sector and region of the UK.

Red Flag Alert’s algorithm measures corporate distress signals, drawing on company accounts and factual, legal and financial data from a wide range of relevant sources, including intelligence from the UK’s leading insolvency business, BTG Begbies Traynor. The algorithm was refreshed in H1 2023 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure the consistency of comparative data.

Algorithms which drive Red Flag Alert were improved at the end of 2023, with companies now measured against a new scorecard of indicators to give greater insight and accuracy into the health of businesses. Two years of work by data scientists analysing eight years of data, taking into consideration pre, during and post-pandemic insights to find signals and patterns indicating businesses in distress, combined with AI tools, means that Red Flag Alert aims soon to be able to predict how many companies in trouble will go on to fail.

The release refers to the number of companies experiencing “Significant” or “Critical” problems, which are those that have been identified by Red Flag Alert’s proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help subscribers to plan for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com

Economically active businesses exclude those that are flagged by Companies House as being, Non-trading, Listed for Strike off / Strike off pending, Insolvent or Dissolved. Companies where there is insufficient information available for RFA to assign a health rating are also excluded.

About BTG Begbies Traynor Group plc

BTG Begbies Traynor Group plc is a leading UK advisory firm with expertise in Restructuring, Financial Advisory, Deal Advisory and Assets and Auctions.

We have over 900 fee earners operating from 45 locations across the UK, together with four offshore offices. Our multidisciplinary professional teams include insolvency practitioners, accountants, lawyers, funding professionals and chartered surveyors.

• Business recovery

o   Corporate and personal insolvency; business restructuring and turnaround; contentious insolvency; creditor services

• Advisory and corporate finance

o  Debt advisory and finance broking; corporate finance; special situations M&A; financial advisory

• Valuations

o  Property, business and asset valuations

• Asset sales

o  Property, plant and machinery auctions; property and business sales agency

• Property consultancy

o  Building consultancy; transport planning; commercial property management; insurance and protection

Further information can be accessed via the group’s website at: https://www.btguk.com/