Understanding the Changes to Company Size Thresholds

In April 2025, changes to company size thresholds will come into effect, impacting businesses of all sizes.

These thresholds, which define whether a company qualifies as a small, medium, or large enterprise, are pivotal in determining eligibility for certain regulations so, it’s important that businesses understand the implications to make sure they comply with the new rules.

In this article Steven Burgess, Audit Partner, explores the changes, why they matter, and what action you can take.

What are company size thresholds

Company size threshold classifications help define a business as small, medium or large based on specific criteria such as revenue and number of employees. The thresholds then influence a company’s eligibility for various financial reporting and statutory audit requirements.

As of 6 April 2025 these thresholds are being increased to take into account economic growth and inflation, arguably with the aim to continue to encourage growth and to provide relief to smaller businesses.

The new thresholds that apply to financial years starting on or after 6 April 2025 are as follows

Source UK company size thresholds to increase | ICAEW

What are the implications for my business?

The changes in company size thresholds will have an impact on businesses of all sizes.

According to ICEAW, the government estimates that the new regulations will result in around 113,000 companies and LLPs moving from the small to the micro-entity category, 14,000 moving from medium-sized to small and 6,000 moving from large to medium-sized.

For those now qualifying as small companies they’ll no longer need an audit (unless they’re part of larger group or voluntary audit) – and there’s currently no requirement to file P&L for a small company – however this is due to change in line with The Economic Crime and Corporate Transparency Act

This may mean that a business that has grown in revenue but still qualifies as a small business under the new thresholds could benefit from reduced administrative burdens, making it easier to focus on growth and innovation.

And for those becoming a medium business, they’ll find that they can remove some of the onerous disclosures of being a large company.

However, for those fast-growing businesses on the cusp of becoming large there may be a need to invest in compliance infrastructure to avoid penalties. And perhaps a need to reassess internal structures and upgrade accounting and HR systems to meet the more stringent requirements.

What’s the two-year rule?

It’s important to remember that a ‘two-year rule’ applies when determining company size.

This means a company only ceases to be small (or medium) once it has breached at least two of the above limits for two consecutive reporting periods. And there are transitional provisions included in the new legislation that will allow for the new limits to be applied for the comparative period to ensure that the ‘two-year rule’ still applies.

Additionally, a group of companies can use the above thresholds to determine size when the results of the group are aggregated, and inter-company transactions are eliminated.

Alternatively, ‘gross’ limits can be applied when inter-company transactions are not eliminated to determine group size. It’s also possible to use a mixture of the gross and net limits. The gross thresholds are as follows:

Source: Croner-i Group size classification | Croner-i Tax and Accounting

What action you can take now:

Medium and large sized businesses all need an audit (unless taking a parent guarantee).  So, those entities with March year ends that will become small (or medium) under new thresholds, may wish to consider preparing their 31/3/25 accounts to 5/4/25 taking advantage of the legislation that allows accounts to be drawn up within 7 days of your accounting reference date. With the next period then commencing after 6 April 2025, you can take advantage of the new size thresholds.

These changes to company size thresholds mark a significant shift in the financial landscape. And, for small businesses in particular, will add greater responsibility on directors and management to ensure financial transparency if an audit is no longer performed.

For help to determine whether the revised thresholds will change your company size classification, and for support for a smooth transition when the new thresholds come into effect, contact Steven or one of our team on 0330 058 6559 or email hello@scruttonbland.co.uk