The new financial limits

For financial years beginning on or after 6 April 2025, the rules governing which UK companies require a statutory audit have changed. Under the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, the size thresholds that determine audit exemption have been increased . These are the first adjustments to these limits since 2016, representing a significant shift in the regulatory landscape for small and medium-sized enterprises.

A private limited company is now exempt from a statutory audit if it meets at least two of three specific tests: an annual turnover of £15 million or less, a balance sheet total (gross assets) of £7.5 million or less, or an average of 50 or fewer employees . These figures replace the previous limits of £10.2 million for turnover and £5.1 million for the balance sheet, while the employee count remains unchanged at 50 . The increase in monetary thresholds is roughly 50% higher than the previous figures, a change designed to reduce the administrative burden on smaller businesses that were previously caught by the net of audit requirements .

It is important to note that these exemptions apply specifically to private limited companies. Certain entities, such as subsidiaries, public-interest entities, and companies operating in regulated sectors, face different rules and may require an audit regardless of their size . For example, while the Companies Act sets the general size tests, specific sector regulations often mandate audits for banks, insurance companies, and other financial institutions irrespective of whether they meet the small company criteria . Directors must therefore check not only the general size limits but also any industry-specific obligations that might override the standard exemption.

The two-year rule and transition

Meeting the new thresholds does not immediately remove the audit requirement. The law includes a stability mechanism known as the two-year rule, which prevents companies from fluctuating between size categories based on temporary changes in their financial position . A company only loses its audit exemption if it exceeds two of the three tests for two consecutive financial years . Conversely, a company that has been subject to audits does not become exempt until it has met the small-company tests for two consecutive years .

This rule creates a buffer period. If a company’s turnover spikes in one year but returns to normal levels the next, it will not be forced into an audit cycle solely because of that single-year breach. However, if the breach persists, the obligation kicks in for the subsequent year. This mechanism is designed to provide certainty and reduce the administrative chaos of frequent category changes .

The timing of a company’s financial year also affects which thresholds apply. A company with a financial year running from 1 January to 31 December 2025 is still measured against the old limits because that year began before 6 April 2025 . The new limits first apply to the year beginning 1 January 2026 for such companies. In contrast, a company with a 31 March year-end will benefit from the new, higher limits starting from the year ending 31 March 2026 . Directors must carefully map their financial year start dates to determine when the new rules take effect for their specific entity.

The government estimates that over 133,000 companies will move down a size category as a result of these changes . This includes approximately 6,000 companies expected to move from the large to the medium category, which carries significant reporting reliefs .

Audit vs. Extended Review

It is crucial to distinguish between a full statutory audit and an extended review, as the two serve different purposes and provide different levels of assurance. A statutory audit is an independent examination of financial statements by a registered auditor, who provides a written opinion on whether the statements show a “true and fair view” of the business . This process involves planning work around risk, testing samples of transactions, and examining systems to form an opinion that gives shareholders reasonable assurance .

An extended review, by contrast, provides limited assurance rather than reasonable assurance. It is a less extensive procedure that does not involve the same depth of testing or risk assessment as a full audit. While both processes result in a report filed at Companies House, the auditor’s role and the level of confidence provided to stakeholders differ significantly . Lenders, investors, and buyers often place greater weight on a statutory audit because of its higher assurance level, making this distinction critical for companies seeking external financing or preparing for sale .

Practical implications for directors

Moving down a size category brings tangible reporting reliefs that reduce the administrative burden on directors. For companies moving from large to medium, the requirement to include a statement on how directors have complied with their duty under section 172(1) of the Companies Act 2006 in the Strategic Report is removed . This is a significant relief, as preparing this statement requires detailed documentation of decision-making processes and stakeholder considerations.

Companies moving from medium to small can no longer be required to have a statutory audit of their annual accounts, although exceptions may apply where an audit is still mandated by other regulations or the company’s articles of association . Additionally, they are no longer required to produce a Director’s Report or include Streamlined Energy and Carbon Reporting within it . These changes simplify the annual reporting process and reduce the time and cost associated with compliance.

For companies moving from small to micro, the reliefs are even more pronounced. They can adopt Section 1A of FRS102 when preparing accounts, which allows for reduced disclosure requirements, or adopt FRS105, a much-simplified accounting framework . They are also no longer required to include non-financial key performance indicators in the Strategic Report or produce a Strategic Report at all . These changes provide micro-enterprises with greater flexibility and lower compliance costs.

Directors must remain aware that while these reliefs reduce burdens, they do not eliminate all responsibilities. Companies must still maintain accurate records, file accounts on time, and ensure that any voluntary audits or reviews are conducted to a standard appropriate for their stakeholders’ needs. The shift in size category is an opportunity to streamline processes, but it requires careful planning to ensure that the new reporting framework is implemented correctly.