The Year of Reckoning: Why UK Insolvencies Are Set to Surge Beyond Historical Highs, and What Financial Risk Leaders Must Do Now

A flatlining economy meets elevated but easing insolvency risk

The UK economy has rarely felt so static. We are in a low growth phase, confidence is fragile, and the operating environment for businesses remains demanding. It doesn’t help then, that headlines have latched onto rising insolvency numbers (including attention-grabbing figures like the recent 17% increase in construction failures), but volume alone does not tell the true story. Insolvency counts will naturally rise when the business population rises. After a decade of steady incorporations, a bigger base of companies means more failures in absolute terms even if underlying fragility is not worsening.

So then, what is a more meaningful metric to look at? I make the case for the rate of insolvency: failures per 10,000 active companies. On that measure, insolvency risk remains relatively low and has edged down slightly over the past year. In other words, we are not seeing an economy-wide surge in corporate failure; we are seeing failure volumes tracking a larger corporate register. That deserves attention, but it does not automatically mean we are heading for a cliff edge.

On the surface, some of the recent increases look incremental. Beneath that, the pressures are compounding in ways that many leaders will recognise.

Small businesses are still the most exposed, but this is not only an SME story. Consumer facing sectors continue to be hit hard, and the strain is now spreading across wider supply chains. High labour costs, lingering energy volatility, tight credit and uneven demand have created the kind of cross current that can throw even well-run firms slightly off course.

Something R3 noted back in 2022 still holds true today: even a small dip or pause in filings can mask the fact that many businesses remain under heavy debt and volatile trading conditions. You can feel that tension in boardrooms and on high streets alike. The difference now is that the water level is low. When the tide recedes, weaknesses that were once hidden become visible.

The task for risk leaders is to spot which of those weaknesses are temporary and which are structural, and know what they can do about it.

Why 2026 may test resilience even with a lower insolvency rate 

I do not think it is helpful to make absolute predictions in a climate like this. Economic conditions can shift, policy can surprise, and some sectors will stabilise faster than others. What feels clearer now is that the underlying picture is more balanced than the headlines suggest. Insolvency rates have softened slightly and remain low by historical standards, even if absolute volumes look elevated because the business base is larger.

That supports cautious optimism as we move into 2026. It is a year where preparation still matters, but it does not automatically point to a broad-based deterioration.

The macro picture is still challenging. When output and demand are weak, companies cannot rely on growth alone to cover structural flaws. They have to fix margins through cost, productivity and pricing. That is harder work when wage pressure is persistent and customers are cautious. But many firms have already adapted, and those that act early can protect resilience.

Refinancing pressure is arriving in waves. Many businesses still carry debt arranged under assumptions from a very different interest rate environment. Even if rates edge down, they remain high against the pre pandemic norm. For firms with thin margins, the step change in servicing costs can be decisive. The offsetting point is that easing inflation and rates gives viable firms more breathing space than they had a year ago.

There is also a behavioural element. Fewer turnarounds are being financed, and more directors are choosing closure over recovery. That means insolvency volumes can rise even without a dramatic recession. So we should not read every increase in filings as a sign of a system-wide slide.

This is why I describe 2026 as a year of reckoning, not because the market is heading for crisis, but because delayed distress is meeting a tougher reality. We are moving from a period where time and support masked problems, to one where those problems have to be faced. For risk teams, that means there is less value in optimism that is not backed by evidence. It also means disciplined confidence, early signals, good judgement, and steady hands on the wheel can materially change outcomes.

Sector pressure points: retail, hospitality, construction, manufacturing

Risk is not evenly distributed. Several sectors deserve the closest attention next year, especially when viewed through insolvency rates (failures per 10,000 companies) rather than raw volumes.

Retail is the first pressure point.

The consumer is still under strain. Even as inflation moderates, household budgets are constrained, and discretionary spend remains the first casualty. Retailers are also carrying high fixed costs in rent, wages and energy, while competing against online models with lower overheads.

The result is a sector where mid-sized chains and smaller specialists can be one poor trading period from crisis. If you are assessing retail counterparties, look beyond headline sales. Examine gross margin stability, inventory turns, and cash conversion. A retailer that is selling but not converting to cash is rarely healthy for long.

Hospitality deserves similar scrutiny.

Insolvency rates here have been running above the market average in recent quarters. The drivers are familiar: cost inflation, wage pressure, fragile discretionary spend, and debt taken on under very different trading assumptions. If you have exposure, watch for margin compression and weakening payment patterns early.

Construction remains a major focus, but for different reasons than the headlines suggest.

Construction often tops insolvency tables by volume because it is the UK’s largest business population. That makes high counts statistically expected. Viewed by rate, construction failures are comparatively low and sit behind sectors like retail and hospitality.

That does not mean construction risk disappears. Its structural cashflow fragility means stress shows quickly. Small contractors rely on timely payment and predictable scheduling. When either slips, they often have nowhere to hide. A consistent WUPA profile, with payment delays worsening month on month, is one of the clearest early signals we see in construction failures. If you have credit exposure here, you should be monitoring payment behaviour and order book health in near real time, not quarterly.

Manufacturing is another area to watch.

Energy and input costs have hit hard and global demand is uncertain. Some manufacturers carried through by passing costs on, but that strategy is weakening as customers resist price rises in a flat economy.

There is also the supply chain dimension. One failure upstream can halt production across several firms. For risk leaders, this is a reminder to map dependencies properly. A stable looking manufacturer can become risky very quickly if its critical supplier fails.

The tech and AI correction

Alongside these traditional sectors, there is a thematic risk that is starting to surface as the market corrects . The last few years brought a wave of capital into technology, particularly anything positioned around artificial intelligence. Valuations rose quickly, growth assumptions were bold, and some businesses expanded on the basis that funding would remain plentiful.

That environment is changing. Investors are more selective, the path to profitability is being demanded sooner, and easy follow-on funding is not guaranteed. Some firms will adapt. Others will not. We have seen this cycle before. Hype lifts valuations faster than fundamentals can support. Then reality catches up.

This has practical implications for financial risk leaders. If you have exposure to fintechs, AI suppliers, or fast-growing software businesses, test them against a funding drought scenario. Ask what happens if capital tightens for twelve months. Do they have a path to break even without another raise? If not, you need to reassess limits and dependency.

The long-term story for AI remains positive. But in the short term, the correction will produce failures. We should assess those risks with discipline rather than sentiment.

ECCTA and the rise of verification as a risk tool

One of the most significant shifts coming into 2026 is regulatory, not economic. The Economic Crime and Corporate Transparency Act is reshaping the UK’s corporate environment. For risk leaders, this is not an administrative detail. It changes the fabric of counterparty assessment.

Mandatory identity verification for directors and individuals with significant control is a fundamental improvement. For too long, the UK system allowed anonymous or opaque structures to hide responsibility. That is changing. Verification raises the cost of deception, and it improves the quality of the data that all of us rely on.

There is also a behavioural impact. With stronger scrutiny and the threat of disqualification, director conduct will come under greater pressure. We have already seen courts reinforce the expectation that boards act early and credibly. The Adler ruling last year sent a clear message that delay and brinkmanship are not a strategy. Likewise, recent Supreme Court decisions have strengthened the requirement for transparency on asset movements and valuation. Governance is no longer a soft factor. It is central to risk.

For financial risk professionals, this creates actionable change. Director background checks should be standard in onboarding and periodic reviews. Patterns of repeat failure, phoenix behaviour or opaque control structures should trigger escalation. The Act gives you a stronger basis for those judgments. Use it.

One caveat is that the transition may temporarily lift headline insolvency volumes, even if the underlying rate remains stable. Some companies will not comply and will dissolve. That is not necessarily a bad outcome for the wider market, but it does add to short term turbulence. Again, risk leadership is about staying ahead of it.

Predictive intelligence, ‘what-if’ scenarios, and WUPAs

In a year like this, backward looking analysis will not be enough. It is not that statutory accounts are useless. It is that they arrive too late.

Scenario based modelling is now essential. At Company Watch, our TRI approach (short for Trends, Risks and Insights) works through “what if” scenarios to test resilience.

• What if rates stay higher for longer?
• What if demand softens by ten or twenty per cent?
• What if a major customer disappears overnight?

These are not dramatic hypotheticals. They are real stress cases that many businesses are already experiencing. The purpose of TRI is not to predict the future perfectly, but to illuminate fragility early enough to act.

When a company begins paying more slowly, disputing invoices, or stretching terms without explanation, it is often managing a cash crisis in real time. In almost every major failure case of recent years, unhealthy payment behaviour showed up well before insolvency became public. Once you see WUPAs appear against a company, you are rarely looking at a temporary hiccup. You are looking at a company that is borrowing informally from its suppliers to stay afloat.

Risk teams should treat WUPAs as a formal trigger, not a background noise metric. Payment trends are one of the clearest leading indicators we have.

What financial risk leaders must do now

Let me offer a practical set of steps for the months ahead. None of these are revolutionary, but in my experience, they are the difference between being surprised by failure and being prepared for it.

1. Move monitoring to a rolling rhythm.
Do not wait for year end accounts. Use monthly rolling forecasts, cashflow models and stress tests. Build a habit of asking uncomfortable questions early. What if sales fell by twenty per cent? What if credit tightened further? What if a key supplier failed? Those scenarios sound extreme until they become ordinary.

2. Treat payment behaviour as a leading risk signal.
If you see payment periods lengthening, or a shift from predictable settlement to intermittent late pays, escalate quickly. Combine internal observations with external payment datasets where available. Patterns matter more than one off events.

3. Reprice and rebalance sector exposure.
Construction, retail and manufacturing will continue to carry outsized risk. Review limits and terms accordingly. Increase review frequency for key counterparties in these sectors. Where dependency is high, look for diversification opportunities while you still have options.

4. Build ECCTA verification into your workflows.
Identity verification and director transparency should be integrated into onboarding and periodic reviews. Use the new information to spot repeat failure patterns or governance risk.  

5. Run scenario tests on your biggest exposures.
Use TRI style modelling to stress your top customers, suppliers, or portfolio clusters. If a mild downside pushes them into high-risk territory, consider whether your exposure is appropriate. Scenario tests are most valuable before distress is visible.

6. Keep stakeholders close.
In every restructuring I have seen, transparency buys goodwill. Lenders, landlords, suppliers and regulators are more likely to support credible leadership teams who engage early and honestly. If a counterparty is struggling, a frank conversation now is worth more than a frantic explanation later.

7. Invest in preparedness.
Knowledge creates calm, and calm breeds confidence. That applies internally as much as it does in a distressed company.

A forward looking close

The next wave of insolvency risk in the UK will test financial risk leaders at every level, even in a period where insolvency rates are not historically high. Economic flatline, refinancing pressure, sector fragility, and market correction in technology are converging. The legal environment is also tightening in ways that demand better verification and faster action.

But this period will also define the leaders who can see beyond the immediate disruption. The professionals who thrive will be those who stay curious, communicate openly, and use predictive intelligence to spot strain early. I have seen companies reset and recover precisely because they acted before crisis became inevitable.

Those who approach 2026 with clear eyes and steady hands will not only withstand the turbulence, but they will also help shape what comes next.