Unprecedented numbers of businesses in the UK are experiencing severe financial difficulties, highlighting the precarious economic landscape ahead of Rachel Reeves’s upcoming budget announcement this month.

A recent report from insolvency practitioners Begbies Traynor revealed that 632,756 companies faced a considerable risk of failure between July and September, marking an increase of almost 30% compared to the same timeframe last year, and a 5% rise from the previous quarter.

Begbies Traynor’s assessments are based on various metrics, including retained profit levels, interest coverage ratios, and outstanding liabilities.

This figure represents the highest level of financial distress recorded by Begbies Traynor since the inception of its Red Flag Alert report 20 years ago, surpassing the levels seen during the 2008 global financial crisis.

The rise in corporate distress was largely driven by a nearly 20% escalation in utility companies nearing closure. Moody’s, a credit rating agency, has expressed concerns about the water utility sector’s outlook, cautioning that companies like Thames Water might struggle under debt constraints if they face limitations in raising customer bills.

Additionally, there was a 10.4% increase in food and drug retailers experiencing significant financial distress, a 9.9% rise in the financial services sector, and an 8.7% increase among bars and restaurants. Overall, 21 of the 22 sectors monitored by Begbies Traynor reported rising levels of distress in the last quarter.

Despite these troubling trends, the number of firms facing critical stress—defined as the highest level of distress—fell by 23% to 31,201 in the last quarter from 40,613, attributed to improved financial conditions in the hotels and accommodations, construction, and real estate markets.

Julie Palmer, a partner at Begbies Traynor, warned that upcoming tax increases proposed by Rachel Reeves during the October 30 budget could drive already vulnerable firms to the brink of collapse.

“The expectation of a government transition was seen as a potential driver for much-needed economic support, but there are growing concerns regarding the implications of the forthcoming budget, which could have a detrimental impact on numerous businesses that are already struggling, particularly as many might face increased employee-related tax obligations,” she explained.

Reeves is considering approximately £40 billion in fiscal adjustments, including hikes to capital gains taxes and adjusting employer pension contributions to national insurance.

In separate data released by the Insolvency Service, the number of company insolvencies rose by 2% last month to 1,973 from 1,943, although this is down by 7% year-on-year.

Jo Streeten, managing director at consultancy AECOM, commented, “Business sentiment has declined since the summer, intensifying the focus on the chancellor’s budget.”

“While it seems businesses may have to bear an increased tax burden, there are also anticipations that the budget will introduce new policies aimed at stimulating investment and providing greater clarity regarding significant infrastructure projects.”

On the personal insolvency front, numbers surged by 44% over the past year to 10,651 in September, influenced by the abolition of the £90 fee for obtaining a debt relief order, a formal process aiding individuals in managing their debt commitments, along with other recent policy changes.