A record number of UK businesses are facing significant financial distress, underlining the precarious state of the economy as Chancellor Rachel Reeves prepares to unveil her first budget on 30 October.
A report by Begbies Traynor, the insolvency specialists, revealed that 632,756 companies were at substantial risk of failure in the three months leading up to September—an increase of nearly a third from the same period last year and a 5% rise compared to the previous quarter.
The Begbies Traynor Red Flag Alert report, which tracks key financial indicators such as profit retention, interest coverage ratios, and contingent liabilities, has recorded the highest level of business distress since its inception two decades ago. This surpasses even the figures seen during the global financial crisis in 2008.
Rising distress across industries
One of the key drivers behind the surge in corporate distress has been a sharp 20% rise in the number of utility companies at risk of collapse. This comes amid warnings from Moody’s, the credit rating agency, that major water companies, including Thames Water, may buckle under growing debt burdens unless they are allowed to substantially raise customer bills.
Retailers, particularly in the food and drug sectors, have also felt the strain, with a 10.4% increase in financial distress reported. Other sectors seeing sharp rises include financial services (9.9%) and bars and restaurants (8.7%). Out of the 22 sectors tracked by Begbies Traynor, 21 reported an uptick in distress levels over the last quarter.
However, some areas have seen a reduction in critical stress levels, the most severe form of financial distress tracked in the report. Critical distress among businesses dropped by 23% to 31,201 in the last quarter, down from 40,613, with improvements noted in the hotels and accommodation, construction, and real estate sectors.
Impact of upcoming budget and tax rises
With Rachel Reeves expected to introduce £40 billion in fiscal changes, including potential increases to capital gains tax and the application of national insurance to employers’ pension contributions, concerns are mounting that already struggling businesses could be pushed further toward collapse.
Julie Palmer, a partner at Begbies Traynor, warned that Reeves’s budget could be the tipping point for many firms. “The prospect of a change of government was viewed as a potential catalyst for a much-needed economic boost,” Palmer said. “But there are significant concerns surrounding what the next budget might hold for the economy, and the knock-on effect could be damaging for many businesses teetering on the edge of collapse, as it seems certain many will have to deal with higher employee-related taxes.”
Separate data from the Insolvency Service released on Friday showed a slight increase in company insolvencies, rising by 2% month-on-month to 1,973 in September, although this figure was down by 7% compared to the same time last year.
Mixed business sentiment ahead of budget
Businesses are cautiously awaiting the outcome of the autumn budget, with many concerned that a higher tax burden could worsen the already fragile economic conditions. Jo Streeten, managing director at AECOM, noted that business sentiment had weakened since the summer. “While businesses appear likely to have to shoulder an increased tax burden, there are hopes the budget will also bring with it new policies to boost investment and offer more certainty around major infrastructure projects,” Streeten said.
The retail and hospitality sectors, in particular, are likely to feel the brunt of any new fiscal measures, as they have been among the hardest hit by rising inflation and labour costs over the past year.
Personal insolvencies also on the rise
The financial strain isn’t limited to businesses. Personal insolvencies have surged by 44% over the past year, reaching 10,651 in September, largely driven by changes in government policy. The removal of the £90 fee required to obtain a debt relief order, a formal insolvency process designed to help individuals manage unsustainable debt, has contributed to the sharp rise in personal insolvency figures.
As the country prepares for the upcoming budget, all eyes are on how Reeves will balance the need for fiscal responsibility with measures to encourage economic growth. With a record number of businesses in distress and personal insolvencies on the rise, the stakes for the chancellor’s decisions have never been higher.