Tens of thousands of so-called “zombie” businesses could collapse this year as mounting cost pressures and weak demand push companies to breaking point, insolvency specialists have warned.

New research from Begbies Traynor shows a sharp rise in businesses experiencing severe financial strain, with a 44 per cent increase in companies classed as being in “critical financial distress” in the final three months of last year compared with the same period in 2024.

In total, 67,369 companies were identified as facing critical distress, according to Begbies’ latest Red Flag Alert report. The long-running study analyses public filings such as county court judgments and company accounts, alongside Begbies’ own financial stress scoring, to assess sustained deterioration in key financial indicators.

The hospitality sector was among the hardest hit, following a difficult Christmas trading period marked by weaker consumer spending. Hotels saw a 54 per cent increase in businesses showing signs of critical distress over the past year, while bars and restaurants recorded a 39 per cent rise.

Begbies said companies across the economy were continuing to “grapple with a prolonged period of economic uncertainty”, compounded by rising operating costs from higher wages, elevated interest rates, increased tax burdens and subdued consumer demand.

Julie Palmer, partner at Begbies Traynor, said the current environment was creating a growing pool of zombie businesses, firms able to service the interest on their debts but unable to invest, grow or meaningfully reduce what they owe.

“While many of these organisations have struggled along for years, we see a new catalyst in 2026 that could push some over the edge,” Palmer said. “That catalyst is HMRC beginning to call in a portion of the £27 billion in overdue corporation tax, PAYE and VAT that built up during the pandemic.”

She added that unless these businesses could secure fresh investment or be acquired by “more agile companies”, many were likely to fail.

Predictions of a mass clear-out of zombie firms have been made repeatedly since the 2008 financial crisis, yet a dramatic spike in insolvencies has not materialised outside specific categories. In 2025, there were 23,938 registered company insolvencies, broadly in line with 2024 levels.

However, creditors’ voluntary liquidations, where shareholders wind up insolvent companies that can no longer pay their debts, have hit their highest levels since records began in 1960, with the past four years accounting for the four biggest annual totals.

These liquidations are often used by small businesses and have risen as the cost of voluntary liquidation has fallen and pandemic support measures have been withdrawn. Insolvency professionals have raised concerns that the process can be abused as a relatively low-scrutiny route to walk away from debts.

By contrast, company administrations, where an insolvency practitioner takes control in an attempt to rescue the business or achieve a better outcome for creditors, fell by 6 per cent last year compared with 2024. Administrations are often viewed as a better barometer of wider economic conditions.

Although insolvency numbers in 2024 and 2025 were similar to those seen during the 2008-09 recession, the overall corporate insolvency rate remains well below that peak. Analysts note this is largely because the UK now has far more companies on the register than it did during the financial crisis.

Begbies warned, however, that the combination of higher taxes, rising employment costs and the gradual withdrawal of pandemic-era forbearance could still trigger a delayed reckoning for thousands of financially fragile firms over the coming year.