Construction has been named as the sector with the most firms facing “critical” financial pressure, with almost 7,000 businesses at risk of bankruptcy.

In its latest Red Flag Alert report covering the fourth quarter (Q4) of last year, insolvency practitioner Begbies Traynor said that 6,830 construction firms in the UK ended 2024 in “critical financial distress”.

It defines this category as “often a precursor to formal bankruptcy”.

In Q4, construction had the unwanted status of heading the “critical” category, ahead of support services (6,711 firms) and real estate and property services (6,697).

Tax changes imposed in last October’s budget will increase the financial strain on construction firms and other businesses this year, said Begbies Traynor partner Julie Palmer.

“Even at this very early stage, the outlook for the rest of 2025 is uncertain, at best,” she added.

“Many companies are clearly struggling to adapt to the compounding challenges they face and there is no easy fix, which will be very unsettling for businesses that are struggling to tread water already.

“So, in the absence of a reduced tax burden and a strong economic recovery, I expect the number of insolvencies to continue to rise in 2025 as firms struggle to cope with a perfect storm of rising costs, financial instability and fluctuating market conditions.”

The latest figures make for grimmer reading than the Q3 2024 Red Flag report, which concluded that 28.5 per cent fewer construction businesses were in critical distress compared with the previous quarter.

Construction was still the second-worst affected sector in Q3 with 4,324 firms in critical distress, behind only support services, as firms continued to struggle with the legacy of high material costs and labour inflation.

However, the latest figures show that fewer construction firms are at risk of bankruptcy compared with Q4 2023, when 7,849 businesses fell into this category.

There were 97,603 construction firms in the next most serious category, “significant financial distress” – up from 83,332 year-on-year and an increase on the Q3 total of 90,375.

Overall, the number of UK businesses in critical financial distress reached 46,853 in Q4 last year, down slightly year-on-year (47,477) but up by 50 per cent compared with Q3 2024.

The new Red Flag figures underscore the latest figures from the Insolvency Service. It said earlier this month that construction accounted for the highest number of insolvencies in the year to November 2024, with a total of 4,102 businesses going under.