In a rare piece of genuinely good news for UK businesses, the government has significantly raised the financial thresholds that determine whether your company is classified as micro, small, medium, or large. For financial years beginning on or after 6 April 2025, the turnover and balance sheet limits increased by approximately 50% — the most substantial upward revision to these thresholds in over a decade.
The practical effect is that many thousands of UK companies have moved into a smaller size category without their revenue or assets having fallen at all. A business that was medium-sized last year may now qualify as small. A company that was large may now sit within the medium bracket. And with each downward reclassification comes a meaningful reduction in compliance obligations — fewer mandatory disclosures, lighter reporting requirements, and in many cases, the ability to dispense with a statutory audit entirely.
At CoreAcc Accountants, we have been working through the numbers with clients across Hertfordshire and North London since the regulations came into force. This guide explains exactly how the new thresholds work, who benefits and by how much, and what you need to do to take advantage of the changes for your own business.
Disclaimer: This article is for general information only and does not constitute legal or professional advice. Company law and accounting standards are complex — specific advice should always be sought for your individual circumstances.
What Changed and Why
The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 updated the monetary thresholds set out in the Companies Act 2006. The stated rationale was twofold: to adjust for cumulative inflation since the thresholds were last meaningfully revised, and to reduce the regulatory burden on growing businesses that had drifted into larger size categories purely because of price-level increases rather than genuine structural change.
The old and new thresholds compared
To qualify for a particular size category, a company must satisfy at least two of the three criteria for that category. The thresholds below apply to financial years beginning on or after 6 April 2025.
Any company exceeding the medium-sized thresholds on two or more criteria is classified as Large and subject to the full suite of reporting and audit obligations.
Note that the employee headcount thresholds have not changed — it is the monetary limits only that have been uplifted.
The Two-Year Rule and the Transitional Provision
Under the normal Companies Act rules, a company cannot simply move into a smaller size category because it meets the criteria in one year. The default position is that you must satisfy the qualifying criteria in two consecutive financial years before your size classification changes. This prevents companies from moving in and out of categories year to year as their figures fluctuate.
However, the 2024 Regulations included an important transitional provision that softens this rule for the first year of the new thresholds.
The transitional provision allows companies to treat the new (higher) thresholds as though they had been in place for the financial year immediately preceding the first year in which the new rules apply. In practice, this means that if your first financial year beginning on or after 6 April 2025 is, say, the year ending 31 March 2026, you can look back at your 2024/25 figures and assess them against the new thresholds — not the old ones.
If your figures for both years satisfy the new thresholds for a smaller category, you qualify for that category immediately, without waiting a further year. This transitional rule was specifically designed to allow businesses to benefit from reclassification as quickly as possible.
Worked Example 1: How the Transitional Provision Works in Practice
Fairfield Print & Media Ltd has a financial year ending 31 March each year. Its figures for the last two years are:
Under the old thresholds, Fairfield would have been classified as medium-sized in both years (turnover exceeding the old £10.2m small threshold, balance sheet exceeding £5.1m).
Under the new thresholds, both years now satisfy at least two of the three small company criteria (turnover ≤ £15m ✓, balance sheet ≤ £7.5m ✓, employees ≤ 50 ✓).
Because the transitional provision allows 2024/25 to be assessed against the new thresholds, Fairfield qualifies as small from the financial year ending 31 March 2026 — immediately, without needing to wait a further year. Had the transitional provision not existed, Fairfield would have had to wait until the year ending 31 March 2027 before its classification changed.
What Reclassification from Medium to Small Actually Means
Reclassification from medium to small is the change that carries the most significant practical benefits. It is worth being specific about what those benefits are, because the differences between the two regimes are substantial.
Audit exemption
The single most financially valuable benefit of small company status is the ability to claim an audit exemption. Statutory audits are time-consuming, intrusive, and expensive — for a company previously in the medium category, the annual audit fee can easily run to £15,000–£40,000 or more depending on size and complexity.
To claim the audit exemption, a small company must:
- Qualify as small for the relevant financial year (and normally the preceding year, unless using the transitional provision)
- Not be a public company, a subsidiary within a group that requires an audit, a charity, an authorised insurance company, or certain other regulated entity
- Not have had its members request an audit under section 476 of the Companies Act 2006
- Include a specific directors' statement on the balance sheet confirming: that the company qualifies as small under Companies Act 2006 section 477; that the members have not required an audit under section 476; and that the directors acknowledge their responsibilities for preparing accounts that give a true and fair view
This directors' statement has been strengthened in recent years. The balance sheet must now cite the specific statutory sections and confirm the qualifying criteria — a vague declaration is no longer sufficient.
Adoption of FRS 102 Section 1A
Medium-sized companies that prepare accounts under UK GAAP are required to apply the full version of FRS 102 — the Financial Reporting Standard applicable in the UK and Republic of Ireland. Small companies, by contrast, can adopt FRS 102 Section 1A, which is a simplified version of the standard that omits a large number of disclosure requirements.
Under Section 1A, small companies are not required to include:
- A statement of cash flows
- An analysis of changes in equity (a statement of changes in equity is optional, not mandatory)
- The majority of the detailed note disclosures required under full FRS 102, including detailed breakdowns of financial instruments, lease obligations under FRS 102 Section 20, and related party transactions beyond a simplified disclosure
The reduction in note disclosures alone can save meaningful preparation time and therefore fees.
No Strategic Report requirement
Medium-sized and large companies are required to prepare a Strategic Report as part of their annual accounts — a formal document that analyses the company's business model, principal risks and uncertainties, and key performance indicators. Small companies are entirely exempt from this requirement.
For a company that has been preparing a Strategic Report purely because of its size classification, this exemption eliminates a significant piece of annual work.
Simplified filing at Companies House
Small companies can file "filleted" accounts at Companies House — a version of the accounts that omits the profit and loss account and directors' report from the public filing, while still sending the full accounts to shareholders. This means your turnover, gross profit, and operating profit are not visible on the public Companies House register. For owner-managed businesses concerned about commercial confidentiality, this is a material benefit.
Note: the longer-term trajectory under the Economic Crime and Corporate Transparency Act is for all companies to file a full P&L — but the current timetable for that change is not before April 2028, and an opt-out from public display will be available. We covered this in detail in our separate article on the P&L opt-out.
What Reclassification from Large to Medium Means
For companies moving from large to medium, the benefits are less dramatic than the medium-to-small transition but still meaningful.
A company classified as large must prepare accounts under full FRS 102 (or FRS 101, for subsidiaries of groups using EU-adopted IFRS), produce a Strategic Report with additional content requirements around greenhouse gas emissions and gender pay reporting where applicable, and is generally subject to greater scrutiny from regulators and stakeholders. Large companies are always required to have a statutory audit.
Reclassification to medium does not remove the audit requirement — medium-sized companies must still be audited. However, medium companies benefit from:
- Certain exemptions from the most detailed strategic report content requirements that apply only to large companies
- Exemptions from certain narrative reporting obligations that apply only to large companies
- The ability to use the medium-sized company exemption from including a business review in the directors' report (though this distinction has narrowed under recent legislation)
The practical value of moving from large to medium is therefore less about immediate cost savings and more about reduced narrative complexity in your annual accounts.
Worked Example 2: The Audit Cost Saving for a Newly Small Company
Bridgewater Facilities Management Ltd was classified as medium-sized for the year ending 31 December 2024, with a turnover of £12.5m, a balance sheet of £6.1m and 44 employees. It had a statutory audit costing £18,500 per year.
For the year ending 31 December 2025 (a financial year beginning on 1 January 2025, which is after 6 April 2025 on the question of threshold application — note: companies should confirm their specific eligibility with their accountant), Bridgewater's figures remain similar: turnover £13.1m, balance sheet £6.4m, 46 employees.
Under the new small company thresholds (turnover ≤ £15m ✓, balance sheet ≤ £7.5m ✓, employees ≤ 50 ✓), Bridgewater now qualifies as small. Using the transitional provision to treat the prior year figures against the new thresholds confirms it also qualified as small in 2024. The two-year requirement is therefore met.
Bridgewater can claim the audit exemption for the year ending 31 December 2025, saving:
Over five years, the reclassification is worth over £90,000 in audit fees at current prices — before accounting for the reduction in management time and the Strategic Report preparation.
Worked Example 3: Borderline Criteria — Meeting Two Out of Three
Not every business sits neatly within the thresholds on all three criteria. The two-out-of-three rule is critical for borderline cases.
Northgate Logistics Solutions Ltd has the following figures for the year ending 30 September 2025:
Despite exceeding the turnover threshold, Northgate satisfies two of the three criteria and therefore qualifies as a small company. It can claim the audit exemption and adopt FRS 102 Section 1A — despite generating over £16 million in annual revenue.
This is a point that business owners and even some advisers miss: you do not need to satisfy all three criteria. Two out of three is sufficient, and for many businesses the key variable is whether the employee count and balance sheet can bring them across the line even when turnover is slightly above the limit.
Worked Example 4: The FRS 102 Section 1A Disclosure Saving
Hartley Consulting Ltd is an owner-managed professional services firm newly reclassified as small. Its accountant previously prepared accounts under full FRS 102. The switch to FRS 102 Section 1A removes the following disclosure requirements:
The reduction in note content means Hartley's statutory accounts reduce from 28 pages to 14 pages. The accountancy fee for accounts preparation falls by approximately £1,200 per year as a result of the reduced disclosure work — in addition to the audit saving.
A Note on the ECCTA and P&L Filing
One question we are regularly asked is whether the new size thresholds interact with the Companies House transparency reforms under the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
The short answer is: not directly, but both sets of changes affect what you file at Companies House and it is important to understand the distinction.
The size threshold changes under the 2024 Regulations affect the reporting and audit obligations that apply to your company — what accounts you must prepare, whether you need an audit, and what disclosures you must include.
The ECCTA reforms, by contrast, affect what gets publicly disclosed at Companies House. The government has indicated that from April 2028, small companies and micro-entities will be required to file a full profit and loss account with Companies House — but will be able to opt out of that account being publicly visible on the register. We covered the P&L opt-out in full in our separate article on the ECCTA and Companies House changes.
The interaction to be aware of is this: reclassification as small under the new thresholds will, from April 2028, mean your company is within the group for whom the P&L opt-out is available. Your accounts will need to be filed in iXBRL format via compatible software rather than through Companies House's WebFiling accounts route, which closes in April 2028.
Frequently Asked Questions
What are the new company size thresholds and when did they take effect?
The new thresholds apply for financial years beginning on or after 6 April 2025. The key limits for small companies are turnover up to £15 million (previously £10.2 million) and a balance sheet total up to £7.5 million (previously £5.1 million). For medium-sized companies the limits are turnover up to £54 million (previously £36 million) and a balance sheet up to £27 million (previously £18 million). The employee headcount thresholds — 10 for micro, 50 for small, 250 for medium — did not change. To qualify for a size category, a company must meet at least two of the three criteria.
My financial year does not start on 6 April — do the new thresholds apply to me?
The new thresholds apply for financial years beginning on or after 6 April 2025. This means that if your financial year runs from, say, 1 January to 31 December, the first year to which the new thresholds apply is the year beginning 1 January 2026 (not 2025). A company with a 31 March year end would first apply the new thresholds for the year beginning 1 April 2025. Confirming your specific first applicable year is straightforward — your accountant can confirm this from your incorporation date and accounting reference date.
What is the two-year rule and how does the transitional provision help?
The two-year rule requires a company to qualify for a smaller size category in two consecutive financial years before that classification takes effect. This prevents companies from moving between categories due to a single year's fluctuation in figures. The transitional provision introduced by the 2024 Regulations allows companies to assess the financial year immediately before their first applicable year against the new (higher) thresholds rather than the old ones. If the company satisfied the new thresholds in that look-back year, the two-year requirement is met immediately, allowing reclassification in the first applicable year rather than having to wait a further year.
Does qualifying as small mean I automatically get an audit exemption?
No. Qualifying as small makes you potentially eligible for an audit exemption, but you must also satisfy several additional conditions. These include: not being a public company; not being a subsidiary of a group in a way that removes the exemption; not being a charity or certain regulated entity; and not having your members request an audit under section 476 of the Companies Act 2006. Your directors must also include a specific statutory statement on the balance sheet, citing the Companies Act sections relied upon and confirming the qualifying conditions are met. A general statement is not sufficient.
What is the directors' statement needed to claim an audit exemption?
To claim the small company audit exemption under section 477 of the Companies Act 2006, directors must include a statement on the company's balance sheet confirming: that the company was entitled to the exemption for the relevant year as a qualifying company under section 477; that no notice has been deposited under section 476 by members requiring an audit; and that the directors acknowledge their responsibilities for preparing accounts in accordance with the Act. Recent practice guidance makes clear this statement must reference the specific section numbers and not simply state that the company is "exempt from audit."
What does adopting FRS 102 Section 1A involve?
FRS 102 Section 1A is a simplified version of the UK GAAP financial reporting standard available to small companies. It retains the same recognition and measurement requirements as full FRS 102 (so assets, liabilities, income, and expenses are recognised and measured in the same way) but significantly reduces the volume of disclosures required in the notes to the accounts. A statement of cash flows is not required. Disclosures on financial instruments, leases, and certain related party transactions are simplified. The practical effect is a shorter, simpler set of accounts that takes less time to prepare — which generally means lower accountancy fees.
Can I file filleted accounts at Companies House as a small company?
Yes. Currently, small companies can file a "filleted" version of their accounts at Companies House that omits the profit and loss account and directors' report. This means your turnover and profit figures are not visible on the public register. Shareholders receive the full accounts as normal. The long-term direction of travel under the ECCTA is for all companies to file a full P&L from April 2028, but an opt-out from public visibility will be available. The filleted accounts option continues to apply in the interim.
If I reclassify as small, do I still need a Strategic Report?
No. The Strategic Report is a requirement for medium-sized and large companies. Small companies are entirely exempt. If your company was previously classified as medium and you have been preparing a Strategic Report each year, you can discontinue it once your small company status takes effect. You should ensure your directors' report is also updated to remove any content that was only included because of medium-sized company requirements.
What happens if I wrongly claim an audit exemption?
Claiming an audit exemption when your company does not qualify is a breach of the Companies Act 2006. The consequences can include: accounts being considered invalid; companies receiving notices from Companies House requiring restated accounts; and in serious cases, civil and criminal liability for the directors. In practice, the most common error is failing to satisfy the two-year rule correctly or failing to include the required directors' statement on the balance sheet. Both are avoidable with proper advice.
Does reclassification affect my Corporation Tax position?
No — company size for Corporation Tax purposes is determined by a separate set of rules linked to the associated companies regime and the small profits rate, not the Companies Act size thresholds. Reclassification under the 2024 Regulations affects your accounts and reporting obligations only. Your Corporation Tax position (including whether you pay at the 19% small profits rate or the 25% main rate) depends on your taxable profits and the number of associated companies, independently of your Companies Act size classification.
Do the new thresholds affect group companies?
Group companies are subject to additional rules. A company that is part of a group can only claim the small company exemptions (including the audit exemption) if the group as a whole also qualifies as small — it is not sufficient for the individual subsidiary to fall within the thresholds if the group taken together would be classified as medium or large. The group size test uses the same two-out-of-three criteria applied on an aggregate or consolidated basis. If you are part of a group, your size classification should be reviewed at both the individual entity and group level.
What should I do next to take advantage of the new thresholds?
The first step is to confirm whether your figures for the current and preceding financial year satisfy the new thresholds for a smaller size category — remembering the two-out-of-three rule and the transitional provision. If you qualify, you then need to: notify your accountant so that the accounts are prepared under the correct regime; issue the appropriate directors' statement on the balance sheet if claiming an audit exemption; decide whether to move from full FRS 102 to Section 1A; and plan for the ECCTA P&L filing changes that take effect from April 2028. CoreAcc can carry out this review for you and advise on the most advantageous approach.
What CoreAcc Accountants Can Help You With
The new size thresholds represent a genuine opportunity for many businesses to reduce their compliance burden and save meaningful money. But the rules around qualification, the two-year test, the transitional provision, and the conditions attached to audit exemptions are detailed enough that getting them wrong — in either direction — creates risk.
At CoreAcc Accountants, we can help with:
- Company size reviews: Assessing your current and prior year figures against the new thresholds to confirm your classification and when reclassification takes effect
- Audit exemption eligibility: Confirming whether you satisfy all the conditions to claim the exemption, and preparing the required directors' statement
- Accounts preparation under FRS 102 Section 1A: Transitioning your accounts from full FRS 102 to the simplified small company framework, with a clear explanation of what changes and what stays the same
- Strategic Report review: Advising on whether you can now discontinue the Strategic Report and updating your directors' report accordingly
- ECCTA compliance planning: Ensuring you are prepared for the P&L filing and iXBRL requirements coming into force from April 2028
- Group size analysis: Carrying out the two-level (entity and group) assessment for companies that form part of a larger corporate structure
Get in Touch
If your company's turnover is anywhere between £10 million and £54 million, or your balance sheet total is between £5 million and £27 million, the new thresholds are likely to be directly relevant to you — and the potential savings are real.
Contact CoreAcc Accountants today for a no-obligation review of your company's size classification and what reclassification could mean for your reporting obligations and costs.
CoreAcc Accountants is an ACCA-accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was last reviewed in June 2026 and reflects the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 and legislation in force for financial years beginning on or after 6 April 2025. It does not constitute legal or professional advice.
