The number of UK businesses experiencing critical financial distress has surged by more than a third over the past year, as companies grapple with increased taxes, rising staff costs, and the fallout from the Middle East conflict.
Hospitality and leisure sectors hit hardest
According to research from restructuring firm BTG, the number of firms in financial distress rose by 36.9% in the first quarter of this year compared to the same period in 2025. The total now stands at 62,193, up from 45,416 a year earlier. All 22 sectors monitored by BTG saw an increase in troubled companies, with hospitality and leisure firms faring particularly poorly due to weak consumer confidence and rising costs.
Tax rises blamed for precarious position
BTG, one of the UK's largest insolvency practitioners, pointed to tax rises imposed by Chancellor Rachel Reeves, including increases to employers' national insurance contributions and the national minimum wage, as key factors. Ric Traynor, executive chair of BTG, said these measures, combined with rising energy costs linked to the Iran war, have left many firms in a vulnerable state. He warned that macroeconomic shocks beyond control, coupled with a difficult tax and trading environment, could worsen the situation quickly.
Discretionary spending sectors suffer most
The Red Flag Alert report found that businesses reliant on discretionary spending suffered the most. Hotel and accommodation firms saw a 69.3% rise in critical distress, followed by leisure and culture firms (65.9%), and sports and health clubs (51%). Julie Palmer, managing partner at BTG, noted that rising inflation due to the Middle East conflict and the closure of the Strait of Hormuz would likely exacerbate the problem. She predicted that consumers would tighten their belts as energy bills, inflation, interest rates, and unemployment rise, disappointing those hoping for a rebound in consumer confidence.
However, Palmer suggested that some businesses could benefit if jet fuel shortages and flight cancellations prompt Britons to opt for UK holidays instead. BTG's Red Flag Alert, which has tracked corporate distress since 2004, uses public filings and credit risk scoring to assess financial health. Palmer expects an increasing number of zombie businesses—firms that can only pay debt interest but cannot invest or reduce debt—to fail this year. Traynor added that the shockwaves from the Middle East war will be felt across the global economy for some time.
A Treasury spokesperson said that budget decisions aim to stabilise the economy and support families and businesses, including cutting the cost of living. They highlighted that increasing the national minimum wage boosts pay for over 200,000 young workers, and employer NICs are lower when hiring under-21s.
