UK firms in distress surge as taxes, rising costs take a toll

Tens of thousands of ‘zombie’ firms could go bust in 2026
Photo: PA

The number of UK businesses in “critical” financial distress is surging as firms grapple with an increased tax burden, unpredictable economic outlook and rising costs, according to insolvency specialist Begbies Traynor, Bloomberg quotes.

Corporate distress increased 43.8% in the fourth quarter compared with a year earlier, and all 22 sectors covered by the firm’s proprietary Red Flag Alert tracker saw a deterioration in their financial health. Distress was up 21.3% compared with the previous quarter, Begbies Traynor said in a report published Thursday.

“The continued rise in critical financial distress is clearly concerning for the UK economy,” said Ric Traynor, executive chairman of Begbies Traynor. “Last year was not easy for UK businesses, and the start of 2026 suggests there is no relief in sight.”

British firms spent much of 2025 grappling with higher costs as a result of inflation and government tax policies. Negative commentary from politicians on the bleak state of public finances as well as tax rises also dented consumer confidence.

Lackluster spending over the key Christmas trading period left consumer-facing industries among the hardest hit, according to the report. Leisure, hotels and accommodation, as well as bars and restaurants, recorded some of the steepest increases in distress over the past year, the report showed.

There’s a growing cohort of so-called “zombie” companies that are likely to fail without fresh investment or takeovers, Begbies Traynor warned.

Meanwhile, more firms are expected to enter formal insolvency in 2026 as HM Revenue & Customs starts to pursue billions of pounds in overdue taxes, potentially driving further unemployment, the firm added.

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