How the 2025–26 Company Size Thresholds Impact Small and Micro‑Entities
From 1 April 2026, the financial thresholds that determine company size for statutory reporting in the UK will be significantly increased. This may seem like a technical change, but it has practical and financial implications for thousands of businesses. Companies that were previously classified as medium-sized may now fall within the small company or even micro‑entity thresholds. This change brings with it the opportunity to simplify annual accounts, reduce disclosures, remove the need for audit, and lower the administrative burden and cost of compliance.
In this article, we’ll explain exactly what’s changing, who it will affect, and how businesses should prepare ahead of time.
Why is this happening?
The thresholds that define company size in the UK have remained largely unchanged since 2016. However, inflation and changes in the business landscape have increased the compliance burden on many companies. In particular, businesses that have grown moderately in recent years may find themselves treated as medium-sized entities—bringing with it more extensive reporting requirements, increased professional fees, and in some cases a requirement for an audit, even when the nature of the business remains straightforward.
In 2024, the government consulted on reforms to Companies House and financial reporting thresholds. The outcome of that consultation has now led to legislative changes that will apply to accounting periods beginning on or after 1 April 2026.
These changes are designed to better align thresholds with economic conditions, and to support smaller businesses by reducing unnecessary regulatory obligations.
What’s changing?
Currently, UK company size classifications are based on three main criteria:
- Annual turnover
- Balance sheet total
- Average number of employees
If a company meets at least two out of the three criteria for two consecutive financial years, it qualifies for the associated size category (small, medium or large). Companies that meet certain lower thresholds may also qualify as micro-entities.
From 1 April 2026, the thresholds for “small” and “micro‑entity” status will increase as follows:
Current thresholds (until 31 March 2026)
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Small company: turnover ≤ £10.2 million; balance sheet ≤ £5.1 million; employees ≤ 50
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Micro-entity: turnover ≤ £632,000; balance sheet ≤ £316,000; employees ≤ 10
New thresholds (from 1 April 2026)
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Small company: turnover ≤ £15 million; balance sheet ≤ £7.5 million; employees ≤ 50
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Micro-entity: turnover ≤ £1 million; balance sheet ≤ £500,000; employees ≤ 10
These increases are substantial. The small company turnover limit, for example, will rise by nearly 50%. The intention is to remove unnecessary compliance burdens for growing businesses that do not yet have the complexity or public interest risk of truly medium or large companies.
What does this mean in practice?
The size classification of a company determines a number of key reporting obligations. If your business becomes newly eligible to be classified as a small company or micro-entity, you may benefit from:
- Exemption from mandatory audit (if other conditions are met)
- Fewer disclosures in your statutory accounts
- The ability to prepare and file simpler financial statements using FRS 102 Section 1A or FRS 105
- The option to file abridged accounts at Companies House (though this is subject to shareholder approval)
- Exemption from preparing a strategic report
This means your statutory accounts could become easier to produce, cheaper to prepare, and more concise when filed publicly.
For micro-entities, the benefits are even greater. These businesses can use the Financial Reporting Standard for Micro-entities (FRS 105), which has the most stripped-down presentation requirements of any UK standard. No directors’ report is required, and disclosures are minimal.
Which companies will benefit most?
These changes will benefit companies that currently exceed one or two of the existing thresholds but fall comfortably within the new ones. That could include many owner-managed businesses, regional service companies, or property SPVs with growing asset bases but limited complexity in operations.
Examples include:
- A professional services firm with turnover of £12m and 40 staff
- A residential property company with £6m of assets and low turnover
- An IT consultancy with £900k turnover and 9 employees
Under current rules, these businesses may be treated as medium-sized and subject to wider disclosure and audit requirements. From 2026, many of them will requalify as “small” or “micro”, easing their compliance obligations.
What about audit?
For many businesses, one of the most meaningful consequences of reclassification will be the ability to claim audit exemption.
Currently, companies lose audit exemption if they breach the small company thresholds. This has been a particular problem for businesses with rising asset values (e.g. property companies) or increasing turnover but minimal risk.
With the thresholds increasing, these companies may find themselves exempt from audit once again. However, it is essential to remember that audit exemption also depends on:
- Whether the company is part of a group
- Whether shareholders request an audit
- Whether the company operates in a regulated sector
Group structures in particular require careful analysis, as the thresholds must be applied on a group-wide basis. It’s also important to understand that audit exemption cannot be claimed mid-year. You will need to qualify as a small company based on your accounts for two consecutive financial years.
Are there any risks or downsides?
While most companies will benefit from simplified reporting, there are some potential pitfalls:
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Loss of disclosures – If a company switches to FRS 105 or FRS 102 Section 1A, it will reduce the amount of financial information available in the public domain. For companies that rely on transparency (e.g. to reassure lenders or potential investors), this might be unhelpful.
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Perception – Some companies prefer to present fuller accounts as a matter of professionalism or reputation. Using minimal disclosures may not align with the expectations of customers, funders, or suppliers in certain sectors.
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Changes must be tracked carefully – The size test requires consistency over two consecutive years. A company that qualifies one year but not the next may face confusion or even compliance risk if this is not tracked closely.
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Group complications – If your company is part of a group, even if it qualifies individually, the group as a whole may not. This can prevent you from using small company exemptions.
What should you do now?
Although these changes do not come into force until April 2026, now is the right time to plan. Directors, financial controllers, and accountants should begin by reviewing their current classification and forecasting financial performance over the next two years.
Key steps include:
- Reviewing historic and projected turnover, balance sheet totals and headcount
- Assessing whether your company or group is likely to fall within the new thresholds
- Considering the benefits and risks of switching to a simplified reporting standard
- Speaking to your accountant or statutory auditor about the transition process
- Preparing to make any elections or disclosures needed to change reporting frameworks from 2026
While some businesses will want to adopt the simpler approach as soon as they qualify, others may choose to continue with fuller disclosures for strategic or reputational reasons. The key is to make an informed decision, well in advance of your 2026 year-end.
Final thoughts
The 2025–26 increase in company size thresholds represents one of the most significant shifts in financial reporting requirements for UK SMEs in nearly a decade. For many companies, it provides a welcome opportunity to simplify compliance and reduce reporting costs. However, the transition will require careful planning and should not be left until the last minute.
At Merranti Accounting, we are already working with clients to review their eligibility and assess whether a change in reporting approach would be beneficial. If you are unsure how these changes apply to your business, we recommend getting in touch early to ensure a smooth and compliant transition.
Want tailored advice on how these changes affect your business or group?
Contact Merranti Accounting today and speak to one of our advisers about a reporting review for 2026 and beyond.
