Audit Thresholds Explained: Does Your Company Actually Need One?

The Short Answer

For financial years beginning on or after 6 April 2025, a UK private company does not need a statutory audit if it qualifies as small. It qualifies as small if it meets at least two of these three conditions:

Turnover of not more than £15 million
Balance sheet total of not more than £7.5 million
Not more than 50 employees on average

Those money limits went up by roughly half. Turnover was £10.2 million. The balance sheet total was £5.1 million. The employee limit did not move at all.

That sounds like a technical change to a set of numbers. In practice it moved an estimated 133,000 companies and LLPs down a size category, including around 14,000 that went from medium sized to small and can now drop the audit they have been having for years.

If you run one of those companies, you have a decision to make, and the honest version of it is not the one most articles give you. Qualifying for audit exemption and being better off without an audit are two different questions. This guide covers both.

The Full Company Size Table

Company size in the UK is not a judgement. It is a mechanical test set out in the Companies Act 2006, and it decides three separate things: which accounting standard you use, how much you file at Companies House, and whether you need an audit.

Here are the limits before and after 6 April 2025.

Size	Turnover	Balance sheet total	Employees
Micro-entity	£1m (was £632,000)	£500,000 (was £316,000)	10
Small	£15m (was £10.2m)	£7.5m (was £5.1m)	50
Medium	£54m (was £36m)	£27m (was £18m)	250
Large	Above the medium limits	Above the medium limits	Above 250

You need to meet two of the three to sit in a category. Meeting all three is not required, and it is the part people most often get wrong when they check themselves against the numbers.

The same limits apply to LLPs. Groups have their own aggregate versions, covered further down.

Notice what did not change. The employee limits are exactly where they were: 10, 50 and 250. Only the money moved. A company can now be far larger in real terms without being any larger in headcount, which quietly changes which of the three tests actually binds. For a consultancy or an agency, the 50 employee limit is now the one that catches you. For a property or plant heavy business, the balance sheet total is. The turnover test, which is the one everybody thinks about first, is the least likely of the three to be the one that decides your answer.

The Test That Catches People: Balance Sheet Total Means Gross Assets

Section 382(5) of the Companies Act defines the balance sheet total as the aggregate of the amounts shown as assets in the company's balance sheet.

Assets. Not net assets. There is no deduction for liabilities.

This one line has probably caused more incorrect audit exemption claims than every other rule combined, because the bottom of a UK balance sheet shows net assets, and that is the figure owners have in their heads. Your balance sheet will tell you net assets are £900,000. The number that matters for the size test might be £8 million.

A worked version of the problem. A trading company owns a warehouse worth £5.4 million with a £4.6 million mortgage against it, holds £1.9 million of stock and debtors, and £300,000 in the bank.

Net assets: roughly £3 million after the mortgage and trade creditors.
Balance sheet total for the size test: £5.4m + £1.9m + £0.3m = £7.6 million.

That company has failed the balance sheet test by £100,000, on a set of accounts where every visible headline figure looks comfortably small. If it also has turnover above £15 million, or more than 50 staff, it has failed two of three and it is not a small company.

Property developers, construction businesses and anyone carrying fixed assets against debt should check this figure specifically rather than assuming. It is the single most common reason a business finds out late that it needed an audit.

The employee figure has its own definition too, in section 382(6). It is not headcount at the year end. You take the number of people employed under contracts of service in each month, add the twelve monthly figures together, and divide by twelve. Part timers count as one. Seasonal businesses that peak at 70 staff for three months and sit at 40 the rest of the year usually come out fine on that calculation, and are often surprised by it in the right direction for once.

The Two Year Rule, Properly Explained

Company size does not flip the moment you cross a line. Section 382(2) says that where a company meets or ceases to meet the qualifying conditions, that only affects its status if it happens in two consecutive financial years.

There is one exception at the start. In its first financial year, a company is small if it meets the conditions in that year. No history is needed.

After that, the rule works in both directions, and the practical consequences are not symmetrical.

Growing out of small status. Colwyn Interiors Ltd has a 31 March year end and has always been small.

Year to 31 March 2027: turnover £16.4m, gross assets £6.1m, 44 employees. Turnover is over, but the other two are within. Two of three met, so it still qualifies. Nothing happens.
Year to 31 March 2028: turnover £19.8m, gross assets £9.2m, 61 employees. All three exceeded. Colwyn fails the conditions for the first time. Because the failure has only happened once, its status does not change. It is still small for that year, files small company accounts and takes audit exemption.
Year to 31 March 2029: turnover £22m, gross assets £10.4m, 70 employees. Second consecutive failure. Colwyn is no longer a small company. The year to 31 March 2029 needs an audit.

Read that timeline again, because there is a trap inside it that costs money.

Colwyn's first audited year end is 31 March 2029. An auditor forming an opinion on that year has to be satisfied about the opening balance sheet at 1 April 2028, and about the stock count that happened on that date. That date has already passed by the time anybody knows an audit is coming. Nobody was there to observe the count. The opening figures were prepared for unaudited accounts.

The fix is to see it coming. When a company fails the conditions for the first time, that is the year to talk to an auditor, not the year after. An observed stock count at the end of the exemption year costs very little. Reconstructing one after the fact is expensive, sometimes impossible, and can leave you with a qualified opinion on your first ever audit, which is not the document you want to hand a bank.

Dropping into small status. This is where the new rules included something genuinely helpful.

Normally the two year rule would make a medium sized company wait a year before it could use the higher limits. The transitional provision in the 2024 Regulations removes that wait. For a financial year beginning on or after 6 April 2025, you are allowed to look back at the preceding year and ask whether the company would have qualified as small under the new thresholds.

Meridian Fabrication Ltd, 31 December year end:

Year to 31 December 2025: turnover £12.4m, gross assets £6.3m, 44 employees. Against the old limits of £10.2m and £5.1m, it fails turnover and balance sheet. Medium sized. It had an audit.
Year to 31 December 2026: turnover £13.1m, gross assets £6.8m, 47 employees. Against the new limits, all three are met. Small.
The prior year test: rerun 2025 against the new limits. £12.4m under £15m, £6.3m under £7.5m, 44 under 50. It would have been small.

Meridian is small for the year to 31 December 2026, immediately, with no waiting year. It can file small company accounts and claim audit exemption for that year.

One More Trap: Short Accounting Periods

Section 382(4) says that where a financial year is not in fact a year, the turnover limit must be proportionately adjusted.

Shorten a period to nine months and your turnover limit is nine twelfths of £15 million, which is £11.25 million. The balance sheet and employee tests are not pro-rated, only turnover.

Companies shorten periods for all sorts of reasons: aligning with a new parent, moving to a March year end, tidying up after an acquisition. It is easy to do and easy to forget that you have just cut your own audit threshold by a quarter.

Worth knowing alongside this: under the Companies House reforms, companies will be limited to shortening an accounting reference period once every five years unless they can give a business reason, so the casual period change is on its way out anyway.

The Four Routes to Audit Exemption

Being small is the most common route, not the only one.

1. Small standalone company (section 477). Meets two of the three small company conditions, is not in a group, is not an excluded company. This covers the overwhelming majority of UK private companies.

2. Dormant company (section 480). A company with no significant accounting transactions in the year is exempt regardless of size, with its own balance sheet wording. There is a separate exemption in section 394A that lets a dormant subsidiary skip preparing individual accounts entirely, on a parent guarantee. Our guide to dormant companies covers both, along with the AA02 filing and what actually counts as a significant transaction.

3. Small member of a small group (section 479). A company that is part of a group can only use the small companies audit exemption if the group as a whole qualifies as small and is not an ineligible group. Your own numbers being small is not enough. The group aggregate limits are:

Group test	Net basis	Gross basis
Aggregate turnover	£15m	£18m
Aggregate balance sheet total	£7.5m	£9m
Aggregate employees	50	50

Net means after eliminating intra-group trading and balances. Gross means before. You may use whichever basis you like, and you should test both, because a group with heavy internal recharges can pass on the net basis and fail on the gross one.

4. Subsidiary with a parent guarantee (section 479A). Any size of subsidiary can be exempt from audit if its parent is established under the law of a part of the UK and guarantees all of its outstanding liabilities. The conditions are strict and the paperwork is not optional:

Every member must agree to the exemption for that year.
The parent must give a statutory guarantee under section 479C.
The subsidiary must be included in the parent's consolidated accounts, which must disclose that the exemption is being taken.
The written member agreement, the parent guarantee, the consolidated accounts, the group audit report and the parent's annual report must all be filed with the registrar on or before the date the subsidiary files its accounts.

Miss the filing deadline on any of those documents and the exemption fails for that year. There is no discretion and no repair. This route saves real money in groups with a lot of small subsidiaries, and it is completely unforgiving about process, which is a bad combination in a business where the company secretarial work is nobody's actual job.

Who Cannot Claim Audit Exemption At All

Some companies are outside the small companies regime whatever their numbers say. Under sections 384 and 478, that includes:

Public companies
Authorised insurance companies, banking companies, e-money issuers, MiFID investment firms and UCITS management companies
Companies carrying on insurance market activity
Scheme funders of a Master Trust pension scheme
Trade unions and employers' associations
Any member of an ineligible group

That last one is the one that catches ordinary businesses. A group is ineligible if any member of it is a traded company, a body corporate whose shares trade on a UK regulated market, an e-money issuer, an insurance or banking company, a MiFID firm or UCITS manager, or a person with Part 4A permission under FSMA to carry on a regulated activity.

The practical version: if anybody anywhere in your group holds an FCA authorisation, every company in that group may lose audit exemption, including the ones with no connection to the regulated business. Owner managed groups that added a small regulated entity, a mortgage broker or an insurance intermediary for instance, have had this land on them without warning.

Separately, charities are on a completely different regime under charity law with their own income based thresholds, which are also being raised. If you run a charitable company, do not use the figures in this article.

Your Shareholders Can Overrule You

Even where a company qualifies, section 476 gives members holding not less than 10% in nominal value of the issued share capital, or 10% of any class of it, the right to require an audit. In a company without share capital, it is 10% of the members by number.

The notice has to be in writing, delivered to the registered office, and it must arrive not later than one month before the end of the financial year in question. Once it is properly given, the company has no choice.

This is a genuinely useful right and it is barely used. If you hold a minority stake in a private company, own no part of the management, and receive a set of unaudited accounts once a year prepared by an accountant appointed by the majority shareholder, an audit is the only independent check available to you. It costs the company money and it will not make you popular, but it exists for exactly that situation. Note the deadline: you must act before the year end, not after you have seen the accounts you dislike.

The Wording That Has To Go On the Balance Sheet

Audit exemption is not automatic in the sense of requiring nothing from you. Directors have to put a statement on the balance sheet, above their signature, and Companies House rejects filings for getting this wrong more often than for almost anything else.

For a small company, the statements confirm three things: that for the year ending on the relevant date the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies; that the members have not required an audit under section 476; and that the directors acknowledge their responsibilities for keeping adequate accounting records and preparing accounts that give a true and fair view.

Dormant companies use section 480 instead of 477. Section 479A subsidiaries cite that section and the guarantee.

Under the Companies House reforms, this is being tightened further. Directors claiming audit exemption will have to state which exemption they are relying on and confirm the company meets the qualifying criteria, which is a direct response to how many companies currently claim an exemption they are not entitled to.

What Changes in April 2028

The audit rules got looser. The filing rules are about to get tighter, and the two changes point in opposite directions.

Under the Economic Crime and Corporate Transparency Act 2023, from 1 April 2028:

Small companies and micro-entities will have to file a profit and loss account with Companies House. Micro-entities have never had to. Small companies have had the option not to, which is what "filleted" accounts are.
Abridged accounts are being abolished. The option to combine line items so that turnover disappears into gross profit goes.
Accounts must be filed using commercial software. Web filing and the paper route close for accounts, though they stay open for other filings such as the confirmation statement.
Companies will be able to opt out of publication of some of that information on the public register, though the position on what stays visible has moved more than once.

That date has already slipped from April 2027, and the reforms were paused and reviewed before being reconfirmed in June 2026. Treat the date as firm enough to plan for and loose enough not to build a business case on.

If your accounts are prepared on decent software already, most of this is a non-event. If your year end is currently a spreadsheet exercise that somebody keys into the Companies House web form, it is a real change and 2028 is closer than it sounds.

Common Mistakes

Using net assets instead of gross assets. Covered above and worth repeating, because it is the mistake that most often turns a claimed exemption into a required audit.
Testing the company and forgetting the group. Your figures being small is irrelevant if the group is not small, or is ineligible.
Assuming a foreign parent works for section 479A. The parent has to be established under the law of a part of the United Kingdom. An overseas parent guarantee does not qualify.
Filing the section 479A documents late. They must reach the registrar on or before the date the subsidiary's accounts are filed, not by the accounts deadline.
Forgetting to pro-rate turnover after shortening a period.
Thinking one bad year forces an audit. It does not. Two consecutive years do.
Thinking one good year removes an audit. Normally the same rule applies in reverse, but for financial years beginning on or after 6 April 2025 the transitional provision lets you use the new limits for the prior year test and get there immediately.
Dropping the audit without telling the bank. Facility agreements routinely require audited accounts. Breaching that covenant to save an audit fee is an expensive trade.

Our View

"Small" has stopped meaning anything. A company turning over £15 million with 50 staff is not small in any sense a normal person would recognise. It is a substantial regional employer. The word survives because it is a legal term of art, but the gap between the legal meaning and the ordinary one is now wide enough to mislead people reading a set of filed accounts. When you see small company accounts on the register, they could belong to a business with two employees or to one with fifty and eight figures of revenue, and nothing on the filing tells you which.

The threshold rise is real deregulation, and the P&L filing change takes some of it back. Government has removed the assurance requirement from around 14,000 companies while preparing to require every small company to publish its trading result. Less independent verification, more public data. That combination is unusual, and we do not think it has been thought through as a package. The audit was the thing that made small company filings trustworthy. Removing it while increasing what gets published means more numbers on the register with less standing behind them.

Qualifying for exemption is not a reason to take it. This is the part the compliance-focused articles skip. If you have had an audit for five years and you have just dropped into the small category, the question is not whether you are allowed to stop. It is who reads your accounts and what they do with them. Ask three questions before you decide:

Does your lender require audited accounts? Read the facility agreement rather than remembering it. If it does, the audit is not optional whatever the Companies Act says.
Might you sell within five years? A buyer's due diligence on three unaudited years costs more, takes longer and produces more price adjustments than diligence on three audited ones. Anyone thinking about an exit should read our guide to how a business is valued with the audit question in mind. The fee you save is usually smaller than the discount you take.
Do you have shareholders who are not in the business? Minority holders, family members, an old investor. An audit is the cheapest way to keep those relationships boring.

If all three answers are no, drop it. Most small companies genuinely should, and the money is far better spent on monthly numbers you can actually run the business with. If any answer is yes, keep it and treat the fee as a cost of your capital structure rather than a compliance tax.

Plan the audit on the way up, not on the way down. The two year rule is designed to stop companies flipping in and out of audit, and it does that well. The side effect is that it delivers the news late. By the time the second consecutive failure confirms you need an audit, the opening balance sheet for that audit is history and the stock count that supports it never happened. If you are growing through the limits, get an auditor to observe your year end count in the last exempt year. It is a small cost that prevents a qualified first opinion.

The exemption most often claimed wrongly is section 479A. Not because directors are dishonest, but because it depends on five separate documents reaching Companies House on time in a group where nobody owns the process. We have seen the guarantee filed a fortnight after the accounts, which invalidates the exemption for the whole year. If you are running that exemption across several subsidiaries, put the filings on a checklist with an owner, or accept that one of them will fail eventually.

How IAK Can Help

We are not registered auditors, and we think that is a useful thing to say out loud, because it means we have no commercial interest in telling you that you need an audit.

What we do is the work either side of it. We run the size tests properly, including the gross assets figure that catches asset heavy businesses and the group aggregates on both the net and the gross basis. We prepare unaudited statutory accounts for small businesses, including micro-entity accounts under FRS 105 and small company accounts under FRS 102 Section 1A, with the correct audit exemption statements on the balance sheet. Our accounting team handles the filing and our bookkeeping and Xero teams keep the underlying records in the state an auditor would want to find them if one ever turns up.

Where a company is heading through the thresholds, we do the forecasting that tells you when, and we get you audit ready rather than audit surprised. That means clean reconciliations, a supportable stock figure, and a set of opening balances somebody can stand behind. When an audit is genuinely required, we introduce you to a registered auditor and act as the finance function alongside them, which is usually the cheaper way round because most audit overruns are caused by records the auditor has to fix before they can test anything.

We do a lot of this work with construction companies and property developers, where the balance sheet total test bites long before turnover does, and with groups where a single subsidiary has quietly cost everybody their exemption.

If you are near any of these limits, or you have just been told you no longer need an audit and you are not sure whether to be pleased, get in touch for a free consultation. It is usually a fifteen minute conversation and three numbers.

Sources

Audit exemption for private limited companies, GOV.UK, on the qualifying conditions for financial years beginning on or after 6 April 2025, the excluded companies and the balance sheet statements.
Companies Act 2006, section 382, legislation.gov.uk, on the first year rule, the two consecutive years rule, the definition of balance sheet total as the aggregate of the amounts shown as assets, the average employee calculation and the pro-rating of turnover for short periods.
Companies Act 2006, section 384, legislation.gov.uk, on companies excluded from the small companies regime and the definition of an ineligible group.
Companies Act 2006, section 478, legislation.gov.uk, on companies excluded from the small companies audit exemption.
Companies Act 2006, section 479A, legislation.gov.uk, on the subsidiary audit exemption, the parent guarantee under section 479C and the documents that must be delivered to the registrar.
The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, legislation.gov.uk, on the new micro, small and medium thresholds, the group net and gross limits, the 6 April 2025 commencement and the transitional provision allowing the new thresholds to be applied to the preceding year.
UK company size thresholds have increased, ICAEW, on the estimated numbers of companies moving between size categories and the directors' report changes made by the same regulations.
Falling below the audit threshold, Price Bailey, on the practical implications for companies that drop out of audit.
The latest ECCTA accounts reform, Saffery, on profit and loss filing for small companies and micro-entities from 1 April 2028, the removal of abridged accounts, software only filing, the enhanced audit exemption statements and the restriction on shortening accounting periods.