'Critical' financial distress leaps by a third in Q1 2026

More than 60,000 UK firms now on cliff edge as pressures on businesses mount

Highlights:

·      In Q1 2026, the number of UK businesses in 'critical' financial distress increased more than a third (36.9%) year-on-year to 62,193 (Q1 2025: 45,416)

·      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

·      'Significant' financial distress increased 9.6% year-on-year to 634,867 firms (Q1 2025: 579,276)

·      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

The latest Red Flag Alert research from BTG for Q1 2026, has revealed the number of businesses in 'critical' financial distress rose by more than a third (36.9%) compared to the first quarter of 2025, signaling the piling pressure on UK businesses amid major global and domestic challenges.

As of 31 March 2026, 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 contribution and national minimum and 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 a 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."

For more information, visit www.btguk.com

ENDS

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About BTG

BTG is a leading financial and real estate advisory firm. We use our expertise to enhance, protect and realise the value of our clients' businesses, assets and investments. Turning complexity into clarity and delivering optimal outcomes; we support our clients in funding and delivering their projects and realising value. At BTG, we don't just advise we act, putting our expertise into action.

Formerly Begbies Traynor Group plc, the leading advisory group rebranded to BTG Consulting plc in February 2026, unifying its financial and real estate advice and expertise under eight service lines across three core brands, BTG, BTG Begbies Traynor and BTG Eddisons. More information on the rebrand can be found here.

www.btguk.com

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.