A UK company’s size category under the Companies Act 2006 depends on whether it meets at least two of three limits: turnover, balance sheet total and average number of employees. For financial years beginning on or after 6 April 2025 the limits are £1 million, £500,000 and 10 for a micro entity, £15 million, £7.5 million and 50 for a small company, and £54 million, £27 million and 250 for a medium sized company; a company above the medium limits is large. After the first year, a company normally changes category only when it meets or fails the test in two consecutive years.

What are the current size thresholds?

Each category is tested by the same three measures. A company qualifies if it satisfies two or more of them, so it can exceed one limit by any amount and still qualify.

Category Turnover not more than Balance sheet total not more than Average employees not more than Section
Micro entity £1 million £500,000 10 384A
Small £15 million £7.5 million 50 382
Medium £54 million £27 million 250 465
Large Any company that does not qualify as micro, small or medium

These figures were brought in by the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 (SI 2024/1303) for financial years beginning on or after 6 April 2025. For earlier years the turnover and balance sheet limits were £632,000 and £316,000 (micro), £10.2 million and £5.1 million (small) and £36 million and £18 million (medium). The employee limits did not change. The same increases apply to limited liability partnerships.

How is each measure worked out?

Turnover

Section 474 defines turnover as the amounts derived from the provision of goods and services, after deducting trade discounts, VAT and other taxes based on those amounts. If the financial year is longer or shorter than twelve months, the turnover limit is adjusted in proportion: a nine month period is compared with three quarters of the limit.

Balance sheet total

The balance sheet total is the aggregate of the amounts shown as assets in the balance sheet. It is gross assets, before deducting any liabilities. A company with £8 million of assets and £6 million of debt has a balance sheet total of £8 million, not £2 million.

Employees

The employee figure is a monthly average of people employed under contracts of service. For each month of the financial year you count the people employed at any point in that month, add the monthly totals and divide by the number of months. A seasonal peak therefore counts for only the months in which it occurs.

How does the two year rule work?

In its first financial year a company qualifies if it meets the conditions in that year. After that, section 382(2) provides that meeting or ceasing to meet the conditions changes the company’s status only if it happens in two consecutive financial years. Sections 384A (micro) and 465 (medium) work the same way. The practical effect is that one unusually good or bad year does not move a company between categories.

Illustration only. A small company has turnover of £18 million and a balance sheet total of £9 million in year 1, after several years well inside the small limits. It fails the small test for year 1 but stays small for year 1 because it has failed in only one year. If year 2 is also above two limits, it becomes medium for year 2. If year 2 falls back inside the limits, it never stopped being small.

What did the April 2025 transitional rule do?

Regulation 3 of SI 2024/1303 deals with the first financial year beginning on or after 6 April 2025. When deciding whether a company qualifies for that year, earlier years are judged as if the higher thresholds had always applied. Without this, the two year rule would have kept many companies in a higher category for an extra year.

Illustration only. A company with a 31 December year end had turnover of £12 million, a balance sheet total of £6 million and 60 employees in 2024 and 2025. Under the old limits it failed two of the three small tests in both years, so it was medium. Its first year under the new rules is the year beginning 1 January 2026. It meets the new turnover and balance sheet limits in 2026, and under regulation 3 it is treated as having met them in 2025 too, so it is small for 2026.

How are parent companies and groups tested?

A parent company can be small only if the group it heads qualifies as a small group (section 383), and medium only if the group qualifies as medium (section 466). The group figures are the members’ figures added together, and each test can be passed on either a net basis, after eliminating intra group transactions, or a gross basis.

Group test Small group Medium group
Aggregate turnover £15 million net or £18 million gross £54 million net or £64 million gross
Aggregate balance sheet total £7.5 million net or £9 million gross £27 million net or £32 million gross
Aggregate employees 50 250

Subsidiary figures come from each subsidiary’s individual accounts for the year ending with, or last before, the parent’s year end. A parent can be a micro entity only if it meets the micro limits itself and its group qualifies as small (section 384A(8)). Group accounts are covered in consolidated accounts under FRS 102.

Which companies cannot use the size exemptions?

Passing the numerical tests is not enough. Section 384 excludes from the small companies regime any company that at any time in the year was a public company, an authorised insurance company, a banking company, an electronic money issuer, a MiFID investment firm, a UCITS management company, carried on insurance market activity, was a Master Trust scheme funder, or was a member of an ineligible group. A group is ineligible if any member is, for example, a traded company or a body corporate whose shares are traded on a UK regulated market. Section 467 applies similar exclusions to the medium sized provisions, so a public company is treated as large for reporting purposes whatever its size.

The micro entity regime has further exclusions in section 384B, including charities, investment undertakings, financial holding undertakings and credit institutions. These are explained in which companies cannot use the micro entity regime.

What changes with each category?

  • Micro entity: can prepare accounts under FRS 105 and need not prepare a directors’ report (section 415(1A)).
  • Small: is exempt from audit under section 477, subject to the conditions explained in audit exemption for small companies, does not prepare a strategic report (section 414A(2)) and has filing choices under section 444, set out in small company filing options.
  • Medium: must prepare a strategic report but can leave out non financial key performance indicators (section 414C(6)) and the section 172(1) statement (section 414CZA(2)), and must deliver its full accounts and reports to Companies House (section 445).
  • Large: carries the full reporting load, including the section 172(1) statement and, for financial years beginning on or after 1 January 2026, supplier payment reporting in the directors’ report. See the strategic report and what goes in a directors’ report.

Companies House guidance says that from 1 April 2028 small companies and micro entities will have to deliver a profit and loss account and abridged accounts will end.

Are these the same size tests that HMRC uses?

No. The Companies Act categories decide accounting, audit and reporting duties only. Tax rules have their own tests. For example, HMRC treats a company as large for Corporation Tax instalment payments when its taxable profits are at an annual rate of more than £1.5 million, a threshold that is divided between associated companies. Even within company law, some disclosure rules carry their own limits: the energy and carbon reporting exemption in Part 7A of Schedule 7 to SI 2008/410 still uses turnover of £36 million, a balance sheet total of £18 million and 250 employees, figures that were not raised in 2025. See Corporation Tax deadlines for the payment side.

What mistakes come up most often?

  • Using net assets instead of gross assets for the balance sheet total.
  • Counting employees at the year end only, rather than averaging month by month.
  • Forgetting to scale the turnover limit for a short or long accounting period.
  • Moving a company between categories after one year, ignoring the two year rule and the 2025 transitional look back.
  • Testing a parent company on its own figures when the group test decides the answer.
  • Assuming a small private subsidiary of a listed or regulated group can use the small regime when the group is ineligible.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.