UK audit exemption thresholds for small companies

From 6 April 2025, the UK government increased the company size thresholds used to determine whether a business qualifies as a micro-entity, small, medium-sized or large company. These changes directly affect statutory audit requirements, audit exemption eligibility and financial reporting obligations for many UK businesses.

As businesses continue through the 2026 reporting cycle, the revised audit thresholds remain an important consideration for directors assessing compliance, governance and future planning.

The updated limits were introduced to reflect inflation since the previous thresholds were set in 2013 and are intended to reduce the administrative burden on smaller companies. However, while many businesses may now qualify for audit exemption or simplified reporting, the position is not always straightforward. Group structures, shareholder rights, lender requirements and wider reporting obligations can still mean a statutory audit is required.

What is the audit threshold?

The audit threshold determines whether a UK company must obtain a statutory audit of its annual financial statements.

In general, a company may qualify for audit exemption if it satisfies at least two of the three small company thresholds relating to turnover, balance sheet total and average number of employees.

While the monetary thresholds increased from 6 April 2025, the employee limits remained unchanged.

The revised thresholds apply to financial years beginning on or after 6 April 2025.

What are the current small company audit thresholds?

To qualify as a small company, an entity must not exceed at least two of the following thresholds:

– Annual turnover of £15 million
– Balance sheet total of £7.5 million
– Average of 50 employees

To qualify as a micro-entity, an entity must not exceed at least two of the following:

– Annual turnover of £1 million
– Balance sheet total of £500,000
– Average of 10 employees

If a company exceeds two of the relevant thresholds, it moves into the next size category and may lose access to audit exemption and simplified reporting frameworks.

These revised thresholds remain in force unless further legislative amendments are introduced.

Although many businesses now qualify for audit exemption under the revised thresholds, directors should review their position carefully each year, as group structures, shareholder rights and other statutory requirements can still mean a company requires a statutory audit.

How the revised audit threshold changes affect small companies

The increase in the audit thresholds means many businesses that were previously classified as medium-sized may now qualify as small. Equally, some companies that previously qualified as small may now fall within the micro-entity category.

For many businesses, this may result in reduced reporting obligations, lower compliance costs and potential exemption from statutory audit requirements.

Small companies qualifying for audit exemption may also benefit from reduced disclosures under Section 1A of FRS 102 and exemption from preparing a Strategic Report.

Micro-entities can benefit from further simplification under FRS 105, including streamlined balance sheet and profit and loss formats, fewer disclosure requirements and exemption from preparing a cash flow statement.

While these changes may reduce administrative burden, directors’ statutory duties remain unchanged. Companies must still maintain proper accounting records, prepare compliant annual accounts and file accurately and on time at Companies House.

Many businesses are also using the revised audit thresholds as an opportunity to reassess governance arrangements, funding requirements and future growth plans. In some cases, companies may choose to retain an audit voluntarily to support lender relationships, investor confidence or acquisition readiness.

Understanding the two-year rule for company size thresholds

Under the Companies Act 2006, a company is generally required to meet the relevant size criteria for two consecutive financial years before changing classification. This is commonly referred to as the “two-year rule”.

As a result, a company does not automatically become small or micro simply because it falls below the revised thresholds in a single financial year.

However, the 2024 Regulations introduced important transitional provisions to accelerate access to the revised thresholds.

For financial years beginning on or after 6 April 2025, companies may apply the new monetary limits retrospectively when assessing the previous financial year for the purposes of the two-year rule.

In practical terms, this means that if a company meets the revised small company thresholds in its first financial year beginning after 6 April 2025, and it would also have met those revised thresholds in the prior year had they applied at the time, it may immediately qualify as small without waiting an additional year.

This transitional relief may allow eligible businesses to access audit exemption and simplified reporting sooner than expected.

Example of how the new audit thresholds apply

If XYZ Limited has a financial year beginning on 1 May 2025, the year ending 30 April 2026 will be its first financial year beginning after 6 April 2025.

If the company satisfies at least two of the revised small company thresholds during that period, and it would also have satisfied those revised thresholds in the year ending 30 April 2025 had they applied, the company may immediately qualify as small and potentially benefit from audit exemption, subject to any other applicable exclusions.

Why some companies may still require a statutory audit

Even where a company falls below the revised audit threshold, a statutory audit may still be required.

This is particularly important for businesses operating within group structures. Companies must assess size thresholds not only at individual entity level, but also on a consolidated group basis.

When determining audit exemption eligibility, group companies may need to consider:

– Consolidated turnover
– Consolidated gross assets
– Total group employee numbers

As explored in our article on, overseas-owned UK subsidiaries may still require audited accounts even where the standalone UK company appears relatively small.

Certain companies are also excluded from audit exemption entirely, including authorised insurance companies, banking companies and e-money issuers.

In addition, a statutory audit may still be required where:

– Shareholders holding at least 10% of shares request an audit
– Articles of association require audited accounts
– Lenders, investors or overseas parent companies require audited financial statements

For many businesses, the decision to retain an audit is not driven solely by legal requirements, but also by governance, credibility and commercial considerations.

Common mistakes when applying the new UK audit thresholds

As businesses reassess their reporting obligations under the revised thresholds, several common issues continue to arise.

One of the most frequent mistakes is misapplying the two-year rule or assuming audit exemption applies automatically following a single year below the revised thresholds.

Businesses also regularly overlook the need to assess consolidated group size, particularly where overseas parent companies or wider international group structures are involved.

Other companies fail to consider shareholder audit rights, lender expectations or the possibility that existing governance arrangements may still benefit from audited financial statements.

Because audit exemption rules must be reassessed each year, companies should review their position carefully whenever ownership structures, funding arrangements or trading performance change.

Does your company qualify for audit exemption?

The  audit threshold changes provide welcome simplification for many UK companies. However, determining whether a business genuinely qualifies for audit exemption often requires more detailed assessment than the headline thresholds alone suggest.

Group structures, shareholder rights, lender requirements and future business plans can all affect whether a statutory audit remains necessary or commercially beneficial.

At Rayner Essex LLP, we help businesses assess their audit requirements clearly and efficiently, ensuring directors understand both their statutory obligations and the wider commercial implications of audit exemption decisions.

Whether your company is reassessing its reporting obligations, navigating group reporting requirements or considering the impact of the revised thresholds on future growth plans, our audit team can help you evaluate your position with confidence.