The UK company size thresholds moved for the first time in a decade, and the change is larger than most business owners realise. For financial periods beginning on or after 6 April 2025, the small company limits rose from £10.2 million turnover and £5.1 million balance sheet total to £15 million and £7.5 million. The employee limit stayed at 50.
That uplift takes a meaningful number of companies out of statutory audit for the first time. It also creates a trap, because being eligible for exemption and being free of an audit requirement are not the same thing.
The two-out-of-three test
A company qualifies as small if it meets at least two of these three criteria:
- Turnover of not more than £15 million
- Balance sheet total of not more than £7.5 million
- Not more than 50 employees on average
Two of three, not all three. A company with £18 million turnover, a £6 million balance sheet and 40 staff still qualifies, because it satisfies two of the tests.
Medium-sized companies now sit at not more than £54 million turnover, £27 million balance sheet total and 250 employees.
The timing catches people out
The new limits apply to periods beginning on or after 6 April 2025, not periods ending. If your year end is 31 December, the first period governed by the new thresholds is the year ending 31 December 2026. A 31 March year end reaches them for the year ending 31 March 2026.
There is a second layer. Size classification normally requires you to meet the criteria for two consecutive years before it changes. A company that has been audited and now falls below the new limits does not usually drop out after one good year.
Where the exemption does not save you
This is the part worth reading twice. Meeting the small company definition does not end the question.
Public limited companies require a statutory audit regardless of size. There is no small-company escape.
Regulated firms are frequently caught by sector rules rather than the Companies Act. Banks, insurers, e-money issuers and a range of FCA-authorised firms have audit obligations under their own regimes. A small payment institution can be well under every Companies Act threshold and still face a safeguarding audit requirement.
Shareholders can force it. Members holding at least 10% of the nominal share capital, or 10% of any class of shares, can require an audit by written notice. In a company with a minority investor or a departed founder still on the register, this is a live risk rather than a theoretical one.
Groups complicate everything. Size is assessed on a group basis where a company is a parent or a member of a group. A small subsidiary of a large group is usually not exempt on its own numbers. Subsidiary audit exemption under section 479A exists but requires a parent guarantee, which many parents decline to give once they understand what they are guaranteeing.
Your funders may not care what the law says. Banking covenants, grant agreements, investor rights letters and prospective purchasers routinely require audited accounts. The Companies Act sets a floor, not a ceiling. We have seen more than one company drop its audit on eligibility grounds and then have to reinstate it mid-year at the request of a lender, which is more expensive and more disruptive than simply continuing.
The question behind the question
Most companies asking “do we still need an audit?” are really asking “can we stop paying for one?” That is a fair question, and sometimes the answer is yes.
But an audit is not only a compliance cost. If you are likely to raise money, sell, refinance or bring in an external shareholder within three years, an unbroken run of audited accounts is an asset in that process. Going unaudited for two years and then returning to audit ahead of a transaction means a buyer’s due diligence team examining a period nobody independently looked at. That tends to cost more in price adjustment than the audit fee ever did.
The middle path many companies take is a review engagement instead. Under ISRE 2400 in the UK, a review provides limited assurance at materially lower cost, and it keeps an independent practitioner looking at the numbers each year. For a business that has genuinely outgrown the need for a full audit but still has a bank or a board to satisfy, it is often the proportionate answer.
What to do about it
Work out which period the new thresholds first apply to. Check whether you have met the criteria for two consecutive years. Then read your banking facility, your shareholders’ agreement and any grant conditions before you assume the audit is optional. In our experience the constraint is more often contractual than statutory.
If you are close to a threshold or unsure whether a group relationship changes the answer, it takes a partner about twenty minutes to work through it with you. That is a considerably better use of time than discovering the position after your year end has closed.