Number of businesses in ‘critical distress’ increases by a third

UK businesses facing ‘critical financial distress’ have surged by 36.9% to 62,193 in Quarter1, according to BTG, while those in ‘significant distress’ rose 9.6% to 634,867 Rising labour costs, higher National Insurance contributions and sustained energy price pressures are hitting margins, particularly in hospitality and leisure. Industry experts warn that many “zombie” businesses are now at risk of tipping into insolvency as conditions worsen.

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 Hotels and Accommodation (+69.3%), Leisure and Cultural Activities (+65.9%) and Sports and Health Clubs (+51%) seeing some of the highest annual increases in ‘critical’ distress Construction (+10.5%, Q1 2026 – 95,355), Support Services (+7.2%, Q1 2026 – 92,983) and Real Estate and Property Services (+15.1%, Q1 2026 – 79,118) experienced the highest rate of year-on-year growth for companies in ‘significant’ financial distress 

BTG’s research, which has monitored the financial health of UK companies for over two decades, found there were 62,193 companies in ‘critical’ financial distress, substantially higher than the 45,416 in Q1 2025. This was despite a 7.7% fall in critical financial distress compared to Q4 2025, which is a seasonal trend in the data at the start of the new calendar year.

A slew of increased taxes on businesses across the year, including increases to employer’s National Insurance Contributions as well as National Minimum Wage and National Living Wage hikes form part of the complex picture of challenges driving increased ‘critical’ distress. Additionally, the UK’s historically high tax burden along with the uncertain economic outlook has impacted consumer confidence, particularly affecting those sectors reliant on discretionary spending, such as hospitality. These challenges have been exacerbated by energy and materials inflation following the outbreak of war in the Middle East towards the end of the quarter. 

Together, this meant all 22 of the sectors monitored by Red Flag Alert experienced an annual increase in the number of companies in ‘critical’ financial distress when compared to the same period in 2025.

Consumer-facing industries, in particular, remain under intense strain as they navigate subdued consumer confidence and rising input and staff costs. This resulted in Hotels and Accommodation (+69.3%), Leisure and Cultural Activities (+65.9%) and Sports and Health Clubs (+51%) delivering some of the highest annual increases in ‘critical’ distress at the end of Q1.

Businesses in ‘significant’ financial distress increased 9.6% annually in Q1 2026 to 634,867, with 21 out of 22 sectors experiencing a year-on-year increase, despite a 12.9% improvement on Q4 2025. The most affected industries were Construction (+10.5%, Q1 2026 – 95,355), Support Services (+7.2%, Q1 2026 – 92,983) and Real Estate and Property Services (+15.1%, Q1 2026 – 79,118).

Julie Palmer, Managing Partner at BTG, said “Businesses who are reliant on discretionary spending will have been hoping consumer confidence would make a comeback this year, but I fear they will be disappointed. Instead, the threat of rising energy bills, inflation, interest rates, and unemployment will see people tightening their belts. 

“Inevitably we expect to see an increasing number of ‘zombie’ businesses tipped over the edge this year. However, we are even starting to see some of the more successful businesses take a more cautious attitude than you might expect as they put cash aside to soak up higher costs and weak demand. From experience, it is the businesses who take action early during such crises and focus on saving costs, driving up stagnant productivity, trimming their operations, and taking opportunities who stand the best chance of survival.

“As always, there will be winners and losers across sectors as geopolitical events reshape the global economy. One area to watch may be the domestic travel and tourism sector in the UK. With global jet fuel supplies waning and summer holidays abroad under threat, we could see a staycation boom at home this year. Should this become a reality in the summer, it could create a much-needed lifeline for the hospitality, retail, leisure, and tourism businesses across the country.

“Unfortunately, no company is immune to such a major energy shock, but some can find ways to mitigate the impact and emerge strong on the other side. However, there’s always a degree of pain first and for some business leaders, overcoming the challenges of today may be a bridge too far after years of challenges since the pandemic.” 

Ric Traynor, Executive Chairman of BTG, said “The shockwaves from a war in the Middle East will be felt across every corner of the global economy for some time to come. After initial signs that the UK’s GDP was improving at the very start of the year, it now feels like after taking a step forward, the UK has taken a few steps backwards following one of the most severe energy shocks in living memory.

“Against this highly volatile backdrop, ‘critical’ financial distress will almost certainly deteriorate further as more businesses struggle with higher energy costs for a sustained period of time. This will have a profound impact on the UK economy and the Chancellor’s goal of delivering a wholesale economic recovery, alongside sustained growth, looks highly unlikely while we wait for a resolution to the war.

“The coming months will be a critical time for the UK economy. It is clear that any further inflationary shock or supply chain disruption would be disastrous for many UK businesses already operating with little margin for error. The economy cannot function if key segments of the supply chain are hollowed out. The truth is that we remain hostage to macro-economic shocks beyond our control, and this combined with one of the most difficult tax and trading environments in recent times means that the situation could get worse very quickly for these vulnerable businesses. The Government must focus on the endemic challenges of improving productivity and attracting the high-quality investment necessary to kickstart growth if the UK is to regain meaningful momentum.” 

 

‘Significant’ distress by sector	Number of businesses	‘Critical’ distress by sector	Number of businesses
Construction	95,355	Construction	9,466
Support Services	92,983	Support Services	8,575
Real Estate & Property Services	79,118	Real Estate & Property Services	7,719
Professional Services	53,115	Professional Services	4,582
General Retailers	43,386	General Retailers	4,448
Health & Education	42,704	Health & Education	4,126
Telecommunications & Information Technology	40,044	Telecommunications & Information Technology	3,426
Media	26,369	Media	2,576
Leisure & Cultural Activities	18,100	Leisure & Cultural Activities	2,261
Food & Drug Retailers	17,696	Food & Drug Retailers	2,084

 

‘Significant’ distress by region	Number of businesses	‘Critical’ distress by region	Number of businesses
London	178059	London	17247
South East	108555	South East	10692
Midlands	78029	Midlands	7522
North West	65721	North West	6380
South West	45708	South West	4565
Yorkshire	44209	Yorkshire	4352
East of England	41848	East of England	3971
Scotland	32282	Scotland	3313
Wales	17566	Wales	1847
North East	12019	North East	1245
Northern Ireland	10814	Northern Ireland	1051