If you have ever asked what size is a small business UK law actually recognises, the short answer is that it depends on three numbers: your headcount, your annual turnover and your balance sheet total. A UK company usually counts as small if it meets at least two of these three limits: no more than 50 employees, turnover of no more than £15 million, and a balance sheet total of no more than £7.5 million.
Those thresholds matter because they decide how much you report to Companies House, whether you need a statutory audit, and which reliefs and schemes you qualify for. Get your size classification right and you save time, money and paperwork. Get it wrong and you risk filing the wrong accounts or missing out on support aimed at smaller firms. This guide breaks down each threshold in plain English, with realistic examples.
The three thresholds that define a small business
Under the Companies Act 2006, a company is classified by size for accounting purposes. To be a “small” company you must meet two out of the following three conditions in a financial year:
- Employees: no more than 50 (measured as the average monthly number over the year).
- Turnover: no more than £15 million.
- Balance sheet total: no more than £7.5 million (this is the total of your fixed and current assets before deducting liabilities).
These figures were increased in 2024 to reflect inflation and to lift more companies out of heavier reporting. Because you only need to meet two of the three, a firm with high turnover but few staff and modest assets can still count as small. The key word is “two out of three”.
There is also a smaller category below this: the micro-entity. A micro-entity meets two of these three limits: no more than 10 employees, turnover of no more than £1 million, and a balance sheet total of no more than £500,000. Micro-entities file the simplest accounts of all.
A quick comparison of UK company sizes
Here is how the main categories line up. Remember, a company must satisfy two of the three limits in its bracket to qualify.
| Category | Employees | Turnover | Balance sheet total |
|---|---|---|---|
| Micro-entity | Up to 10 | Up to £1m | Up to £500,000 |
| Small | Up to 50 | Up to £15m | Up to £7.5m |
| Medium | Up to 250 | Up to £54m | Up to £27m |
| Large | Over 250 | Over £54m | Over £27m |
You will often see the phrase “SME”, which stands for small and medium-sized enterprise. In everyday use, an SME is any business up to the medium threshold, and this is the definition most grant schemes and support programmes lean on. When people talk about micro, small and medium firms together, that is the SME sector.
Why the definition matters for your business
Your size classification is not just a label. It changes real obligations and opportunities.
Lighter accounts and no audit
Small companies can file abridged or simplified accounts with Companies House and usually do not need a statutory audit. That saves accountancy fees, which for a growing small firm can run into several thousand pounds a year if an audit were required. Micro-entities file the barest accounts of all, a balance sheet and a few notes.
Access to reliefs and support
Plenty of government and lender schemes are aimed specifically at smaller firms. The British Business Bank supports finance schemes designed for smaller businesses, and many grants set eligibility by SME size. Knowing your bracket tells you what you can apply for.
Employment and reporting duties
Some duties only kick in above certain sizes. Larger firms face gender pay gap reporting and more detailed disclosures, while smaller firms are exempt. If you are about to take on staff, our guide to hiring your first employee in the UK covers the duties that apply from day one, regardless of size.
A realistic example
Imagine a Bristol-based digital agency. It employs 18 people, turns over £2.4 million a year, and has a balance sheet total of £600,000. Check the three tests:
- Employees: 18, well under 50. Pass.
- Turnover: £2.4m, under £15m. Pass.
- Balance sheet: £600,000, under £7.5m. Pass.
All three are within the small-company limits, so it is comfortably a small company. It is above the micro-entity turnover limit of £1m, though, so it cannot use micro-entity accounts. It files small-company accounts, needs no audit, and qualifies for SME support schemes.
Now imagine a property firm with just 4 staff but a balance sheet total of £9 million in buildings and turnover of £900,000. It passes the employee and turnover tests but fails the balance sheet test. Because it still meets two of the three, it remains a small company. This is why the “two out of three” rule matters so much for asset-heavy businesses.
Turnover thresholds are separate from tax registration
It is easy to confuse the accounting size thresholds with tax thresholds. They are different systems. Your company size for Companies House has nothing to do with when you must register for VAT. That is triggered when your taxable turnover crosses the VAT registration threshold, which is a much lower figure. If your sales are approaching that point, read our explainer on VAT registration and which scheme to choose.
Likewise, Making Tax Digital rules apply based on turnover and tax type, not on your company size classification. Our SME guide to Making Tax Digital in 2026 sets out who is caught and when.
How to measure each figure correctly
Getting the numbers right takes a little care.
- Employees: use the average monthly number over the financial year, counting everyone on the payroll including part-timers as one head each, not by hours.
- Turnover: use the figure from your profit and loss account. If your year is longer or shorter than 12 months, the turnover limit is adjusted proportionately.
- Balance sheet total: this is gross assets, the total of fixed and current assets, before you subtract any liabilities. Many owners wrongly use net assets, which understates the figure.
There is also a “two consecutive years” principle. You generally need to breach or meet the thresholds for two years in a row before your classification changes, which stops a single unusual year from tipping you into a heavier reporting bracket. Your accountant can confirm how this applies to your accounts. Good accounting software makes these figures easy to pull, and our roundup of the best AI accounting tools for UK small businesses shows options that track turnover and assets automatically.
Sole traders and partnerships
The Companies Act thresholds apply to limited companies. If you are a sole trader or an ordinary partnership, you do not file accounts at Companies House at all, so these size categories do not govern your reporting. You still count as a small business in the everyday and grant-scheme sense, and you report your profits through Self Assessment. If you run your business from home as a sole trader, our guide to running a business from home in the UK covers the tax and insurance basics.
Frequently asked questions
What size is a small business in the UK?
For company law, a small business is one that meets two of these three limits: no more than 50 employees, turnover no more than £15 million, and a balance sheet total no more than £7.5 million. In broader everyday and funding terms, an SME is any firm up to 250 employees.
What is the difference between a micro-entity and a small company?
A micro-entity is the smallest category, with limits of 10 employees, £1 million turnover and a £500,000 balance sheet total. A small company sits above that, up to 50 employees, £15 million turnover and a £7.5 million balance sheet total. Micro-entities file even simpler accounts.
Do I need an audit as a small company?
Most small companies are exempt from a statutory audit, which is one of the main advantages of the classification. There are exceptions, for example if your articles require one, if enough shareholders demand it, or if you are part of a larger group. Check with your accountant.
Does my company size affect when I register for VAT?
No. VAT registration depends on your taxable turnover crossing the VAT threshold, not on your company size classification. The two systems are separate, so a small company can still be VAT registered and a micro-entity may need to register too.
How often should I check which category I am in?
Review it at each financial year end when you prepare accounts. Because most changes only take effect after two consecutive years above or below a limit, an annual check is enough for most firms, with a closer look if you are growing fast or acquiring assets.
What to do next
- Pull your three numbers. Check your latest accounts for average employees, turnover and gross balance sheet total, then compare them against the table above.
- Confirm your bracket with your accountant. Ask which accounts you should be filing and whether you qualify for the audit exemption, so you are not paying for reporting you do not need.
- Separate tax from size. Review your VAT position and Making Tax Digital obligations independently, using our VAT and MTD guides linked above.
- Check the official rules. Read the current thresholds on gov.uk company accounts guidance and file through Companies House to stay compliant.
