Insolvencies rise at start of 2025 as businesses brace for extra costs

By:

Add as a preferred source on Google
Although consumer facing firms were hit the worst, levels of distress increased across 20 of the 22 sectors covered in the Red Flag Alert.

The number of insolvencies rose at the start of the year, in a sign that UK businesses continue to struggle ahead of a looming increase in employment costs.

New figures from the Insolvency Service showed there were 1,971 insolvencies last month, six per cent higher than December and 11 per cent above January 2024.

Over three quarters of these (78 per cent) were creditors’ voluntary liquidations (CVLs), a nine per cent increase on December and 14 per cent higher than January last year.

CVLs are mostly used by business owners to close redundant companies with no ongoing business and typically make up the vast majority of total insolvencies.

Source: Insolvency Service

Tim Cooper, president of R3, suggested that firms may be looking to close down ahead of April’s increase in national insurance and the minimum wage, which will pile extra cost pressures onto already cash-strapped businesses.

“A long period of rising expenses coupled with consumers’ reluctance to spend is continuing to take a toll on businesses,” he said.

Sophie Burke, a restructuring partner at Fladgate said the figures reflect “weak consumer confidence and sustained economic pressure…in particular in consumer-facing sectors”.

The figures point to the strained position facing UK businesses ahead of April, when firms will face the double-whammy of higher payroll taxes and a higher minimum wage.

Multiple surveys suggest that firms will cut staff and slash investment budgets to deal with the extra costs, but some firms will likely go bust too.

The impact is expected to be particularly severe in labour-intensive sectors, like retail and hospitality.

Figures from UHY Hacker Young suggest there were 143 insolvencies in the hotel sector last year, up by one on the previous year but over 40 per cent higher compared to 2021.

The number of business closures hit a 30-year high in 2023, driven by a record number of CVLs.

Insolvencies eased off slightly last year, thanks to falling CVLs, but there were more compulsory liquidations in 2024 than at any point in the last decade.