The proposed changes to company size thresholds were put on pause during the UK election period however, the new UK Government has now implemented the threshold changes with the primary goal of reducing the reporting burden on companies.

Set out within The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, the new size thresholds are now effective for periods commencing 6th April 2025.

A company qualifies as a micro, small, or medium-sized entity if it meets two of the three criteria for two consecutive years. Any entity exceeding these limits is classified as large.

1. Micro-entities:

• Turnover threshold increased from £632k to £1m
• Balance sheet total raised from £316k to £500k
• Employee limit remains at 10.

2. Small entities:

• Turnover threshold increased from £10.2m to £15m
• Balance sheet total raised from £5.1m to £7.5m
• Employee limit remains at 50.

3. Medium-sized entities:

• Turnover threshold increased from £36m to £54m
• Balance sheet total raised from £18m to £27m
• Employee limit remains at 250.

Reporting and audit considerations

The changes allow more companies to qualify for simplified reporting regimes. For example, small entities are exempt from enhanced accounts disclosures such as strategic reports and cash flow statements, and are also exempt from statutory audits . Micro-entities are often audit exempt too, and therefore do not need to produce Directors’ reports (though there are government plans to change this in the future).

Small companies within a group must also verify their audit exemption at the group level, this is determined by the consolidated turnover, balance sheet total, and employee count of the entire group, including overseas entities. This is something that is often misunderstood and we do come across UK companies who are unaware of this requirement.

If the group is ‘not small’ then all companies require auditing, unless a subsidiary can take advantage of a group audit exemption – such as parental guarantees under Companies Act s. 479A (although, this is not applicable if the parent company is overseas). Whilst an audit exemption is also not possible for traded companies, trade unions, or for certain financial services companies, most companies will be able to benefit by applying additional disclosures in both the group and the individual subsidiary accounts, but to ensure completeness we recommend seeking advice.

Despite qualifying for exemption, companies may still benefit from an audit as they provide greater assurance, potential for improved internal controls, reduced risk of fraud, and an enhanced ability to raise finance or exit the business in the longer-term by demonstrating transparency and reliability to investors and lenders.

Changes in lease accounting regulations

Recent amendments to lease accounting regulations under FRS 102 require lessees to recognise right-of-use assets and lease liabilities on the balance sheet, effective for periods commencing 1st January 2026. Businesses should prepare for these adjustments for various reasons but in the context of company size changes, the impact on gross assets must be included in a company size determination.

For example, a company with £7m in gross assets and 60 employees at year-end 31 December 2025 exceeds the old size limits (£5.2m in assets and 50 employees). However, if it was considered small in the previous year, it can still report as small for 2025 – and therefore would qualify for audit exemption.

For 2026, the company hopes to maintain its audit exemption, as its gross assets usually stay under the new limit of £7.5m. However, due to lease accounting changes, capitalising its right-of-use assets pushes its gross assets to £8m, exceeding the new limits. Further information on the lease accounting changes can be found in our March 2025 article.

IR35 legislation and medium company status

Designed to prevent significant tax avoidance, the UK’s IR35 legislation aims to catch disguised employment by laying out the criteria for a worker to provide their services through a personal service company. Onus falls on any medium or large private sector employer to determine the status of a contracted worker, via a status determination statement.

Importantly as companies transition from medium to small, the employer needs to meet the new small size limits for two consecutive financial year ends, after which the off payroll working rules state that the IR35 responsibility shifts from the employer back to the contracted worker from the start of the next tax year; being tax year 28/29 for most.

Given a technical knowledge of the legislation is required, where the worker is outside IR35, specialist advice and / or accounting assistance may be required too.

Incorporated charities and the Charities Act

Incorporated charities must adhere to the Charities Act, so despite changes to the Companies Act, a £1m turnover threshold for audit purposes is maintained (this is for England and Wales, and there is no grace period in the same way that exists for companies too). This ensures that larger charities remain accountable, while smaller ones avoid excessive administrative burdens.

Other future considerations

Assuming a company has not reported a long financial period within the last five years, a financial year end can be extended so it is at most 18 months long, in order that the following year end begins on or after 6th April 2025, and in so doing benefit from the new size thresholds.

Directors reports disclosures are set to be simplified (e.g. removing disclosure of post year end events), however this and other disclosures may still be required under the accounting standards.

Streamlined Energy and Carbon Reporting requirements appear set to remain as a requirement based on the previous medium size thresholds, therefore a company transitioning from large to medium, will only be exempt if under the old thresholds (turnover £36m, gross assets £18m, employees 250).

In Summary

Determining company size is complex, and incorrect filings at Companies House remain permanently visible, even if later restated.

Whether you are a company owner, or perhaps contracted worker, we highly recommend seeking advice in relation to the size changes. Feel free to contact me for assistance.