Company size thresholds: expected increases and potential impacts on your business

The UK’s Labour government has confirmed the increases to the company size thresholds. The legislation to implement the proposed increases to the monetary thresholds that define micro, small and medium companies was laid before Parliament on 10 December 2024.

In this article, we outline what the changes are and, critically, how these may impact your business. We consider if these changes impact whether an audit exemption may now be available and if it changes the disclosures in your financial statements.

Changes to company size thresholds

The classification of a company as micro, small, medium or large is determined by the company and corporate group thresholds set out in the Companies Act 2006 (CA 2006). This then determines the reporting and audit requirements for a company.

The government is increasing these thresholds by 50%, to reflect historic inflation and future proof the thresholds for some time. Note that there is no change to the average employee figures.

These changes will be effective for accounting periods commencing on or after 6 April 2025 eg year ended 31 December 2026. The changes aim to simplify reporting requirements for certain businesses and reduce regulatory burdens for companies.

Thresholds will be increased as follows:

What is the impact of the increase in size thresholds?

Impact on a company’s audit requirement

Exemption from the requirement to have annual accounts audited is available to small companies. These changes may mean that some companies will now be eligible for an audit exemption, reducing their compliance costs.

However, the requirement for an audit can be driven by more factors than simply size. Certain factors can render companies ineligible for an audit exemption, such as being part of a non-small group, carrying out particular business activities such as banking or insurance or being itself a public company (ie a plc, whether or not its shares are traded). In other cases, an audit may still be required for reasons such as compliance with a loan covenant or requested by shareholders. And for businesses on a growth trajectory, dispensing with audit, even if permissible, may not be advisable if an unbroken period of audited accounts is likely to be important to potential future investors, lenders and customers.

For accounting periods commencing on or after 6 April 2025, a company or group will be considered as having met the criteria of micro, small or medium if it meets the new thresholds in the current and prior reporting periods. The timeline below outlines in more detail how companies should assess the size criteria as part of the transition to the new thresholds.

If you would like support in understanding if your company requires an audit under these new requirements or how they affect periods of account that are longer or shorter than one year, then please reach out.

Accounting frameworks and reduced disclosure

Small companies are able to take advantage of various reporting, filing and audit exemptions and therefore moving down the bands may save time, effort, and money. For example, small companies preparing financial statements under UK GAAP are able to take advantage of section 1A of FRS 102 The financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) which contains reduced disclosures compared to full FRS 102.

Small companies are also currently permitted to take advantage of reduced filing options which allow the removal of the profit and loss account and directors’ report in the accounts filed at Companies House, otherwise known as filleted accounts. However, the government is separately removing these options as part of the Economic Crime and Corporate Transparency Act and therefore these advantages may not be realised under this legislation.

Micro-entities can adopt a separate accounting standard (FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) which is a simplified accounting framework in terms of recognition, measurement and disclosure.

In terms of narrative reporting, all medium-sized and large companies are required to include a Strategic Report within their financial statements. Medium-sized companies that are re-defined as small under these changes would be able to take exemption from preparing this report.

Outside the annual reporting cycle, large companies are required to report half-yearly on supplier payment practices, payment policies and payment performance. The increase in thresholds will therefore allow certain companies to dispense with this reporting.

There are also simplifications to narrative reporting; the following will no longer be required in the Directors’ Report for large and medium companies:

• Employment of disabled people and employee engagement,
• Financial instruments,
• Existence of branches,
• Engagement with suppliers, customers and others, and
• Important events, future developments and research and development.

In addition, it is possible that increasing the thresholds may have knock on impacts further down the line for other reporting requirements which are loosely but not directly linked to Companies Act size thresholds, such as Modern Slavery Act reporting and Climate-related Financial Disclosure reporting. But we will need to wait and see what knock-on impacts are brought into legislation.

The changes will be welcome news for many companies, particularly those who will be able to take advantage of the many small company exemptions and simplifications.

How we can help

If you’d like support on how your business may be impacted by these changes, in particular over the applicability of any reduced disclosure or audit exemption, then please get in touch.

To stay ahead of the curve, join our Finance Directors’ Briefing 2025, where we’ll be summarising some of the most important changes FDs need to be on top of across financial reporting, tax, and VAT.  RSVP here to reserve your place.