UK audit thresholds and consolidated accounts: a guide for SMEs

Two questions come up constantly with growing owner-managed companies: do we need an audit? and, once there is more than one company in the picture, do we need to prepare group (consolidated) accounts? Both are answered by the Companies Act size thresholds — and those thresholds were uprated by roughly 50% for financial years beginning on or after 6 April 2025, the first change since 2016. The government estimated the uplift would take around 132,000 companies out of mandatory audit and thousands more out of the medium-sized bracket.

If your company or group was hovering around the old limits, it is well worth re-checking your position: many businesses that needed an audit last year are exempt this year. This guide walks through the current thresholds, the audit exemption rules for standalone companies and groups, the situations where an audit is compulsory regardless of size, and the rules on consolidated accounts.

Key takeaways

• Company size thresholds rose ~50% for financial years beginning on or after 6 April 2025: small is now £15m turnover / £7.5m balance sheet.
• You need to breach two of the three tests (turnover, balance sheet, employees) for two consecutive years to change size.
• Being part of a group changes the answer — a small company in a large group can still need an audit.
• Parents of groups that aren't small must prepare consolidated accounts.
• Stepping in or out of audit is worth planning, not just discovering at year end.

The company size thresholds from 6 April 2025

Company size under the Companies Act 2006 is measured against three criteria: annual turnover, balance sheet total (gross assets, before deducting liabilities) and the average number of employees. The limits, for financial years beginning on or after 6 April 2025, are:

Criterion (meet 2 of 3)	Micro	Small	Medium	Large
Turnover (not more than)	£1m	£15m	£54m	Above medium
Balance sheet total (not more than)	£500,000	£7.5m	£27m	Above medium
Average employees (not more than)	10	50	250	Above medium

For comparison, the old small-company limits were £10.2m turnover and £5.1m balance sheet total; medium was £36m and £18m; micro was £632,000 and £316,000. The employee counts did not change. Any company exceeding the medium limits is large.

The two-out-of-three test

A company qualifies for a size category if it meets at least two of the three criteria. So a company with £20m of turnover, £6m of gross assets and 45 staff is still small — it fails the turnover test but passes the other two. This regularly surprises people: high-turnover, low-asset businesses (and vice versa) can sit a long way over one limit and still qualify.

The two-consecutive-year rule

Size is also "sticky". Once a company qualifies as (say) small, it only stops being small if it fails the test for two consecutive years. Equally, a company that has been large must meet the small criteria for two consecutive years before it becomes small — with one helpful transitional rule: for the first period under the new thresholds, you may treat the uprated limits as if they had applied in the previous year too, so a company that would have met the new limits in both years can use the new size category straight away.

Audit exemption for standalone small companies

A standalone private company can normally claim exemption from statutory audit under section 477 of the Companies Act if it qualifies as small for the year using the test above. In practice, for periods beginning on or after 6 April 2025, that means meeting two of: turnover not more than £15m, balance sheet total not more than £7.5m, and not more than 50 employees.

Dormant companies have their own exemption, and micro-entities are automatically within the small-company exemption. To claim exemption, the directors must include a statement on the balance sheet confirming the company is entitled to it and that the members have not required an audit.

When an audit is required regardless of size

Being small is not always enough. An audit is still required, whatever the company's size, where:

• Shareholders demand one. Under section 476, members holding at least 10% of the shares (or 10% of the members, for a company without shares) can require an audit by written notice. This crops up in family and investor-backed companies more often than you might think.
• The articles require one. Some older articles of association mandate an audit — check yours before assuming exemption, and consider amending them if the requirement is unwanted.
• The company is a public interest entity (PIE) — broadly, companies with securities traded on a UK regulated market, banks and building societies, and insurers.
• The company is otherwise excluded under section 478 — including authorised insurance companies, banking companies, e-money issuers, MiFID investment firms and UCITS management companies. Certain other regulated or sector-specific entities (for example many FCA-regulated firms, and bodies such as trade unions) face audit or assurance requirements under their own rules.
• A lender, regulator or contract requires audited accounts. Not a Companies Act requirement, but banks and funders frequently insist on an audit in facility agreements — worth checking before you drop one.

Groups: when a small company still needs an audit

Group membership changes the analysis. A company that is part of a group can generally only use the small-company audit exemption if the whole group qualifies as a small group and is not an "ineligible group".

The small group thresholds

A group is small if, on a two-out-of-three basis, it does not exceed: aggregate turnover of £15m net (£18m gross), aggregate balance sheet total of £7.5m net (£9m gross), and 50 employees. "Net" means after eliminating intra-group transactions and balances as you would on consolidation; "gross" means simply adding the companies together. You can use whichever basis suits — a group can mix net for one criterion and gross for another.

Ineligible groups

A group is ineligible if any member is (broadly) a traded company, a bank or insurer, an e-money issuer, a MiFID investment firm, a UCITS management company or another body corporate whose shares are traded on a UK regulated market. If any group member falls into these categories, no company in the group can qualify as small — so every company in the group loses the size-based audit exemption, however tiny it is.

The parent guarantee exemption (section 479A)

There is a separate route for subsidiaries that are not small: a UK subsidiary can be exempt from audit for a year if its UK parent guarantees all of its outstanding liabilities at the year end under section 479A. The conditions are strict: the parent must be established under UK law, all the subsidiary's members must agree to the exemption for that year, the parent must prepare consolidated accounts that include the subsidiary, and the guarantee (with supporting statements) must be filed at Companies House along with the consolidated accounts. The guarantee is legally enforceable by the subsidiary's creditors — so treat it as a real commercial commitment, not a filing formality. Traded companies, banks, insurers and similar entities cannot use this exemption.

Consolidated accounts: who must prepare group accounts?

Separately from audit, a UK parent company is generally required to prepare consolidated (group) accounts at each year end — a single set of accounts presenting the parent and its subsidiaries as one economic entity — unless an exemption applies. The main exemptions are:

• Small groups. A parent of a group that qualifies as small (using the £15m/£18m and £7.5m/£9m limits above) and is not ineligible is exempt from preparing group accounts. This is the exemption most SME groups rely on — and the 2025 uplift means many groups that previously had to consolidate no longer do.
• Intermediate parents (sections 400 and 401). A parent that is itself a subsidiary need not consolidate if it is included in the audited consolidated accounts of a higher UK parent (section 400) or of a non-UK parent whose consolidated accounts are drawn up in an equivalent manner — for example under UK-adopted or EU-adopted international accounting standards (section 401). Conditions apply: broadly, the exemption is automatic where the higher parent holds more than 90% of the shares (otherwise minority shareholders can demand consolidation), the company must disclose the exemption and file the higher parent's consolidated accounts (with a certified translation if not in English) at Companies House, and it is not available to traded companies.
• All subsidiaries excludable. A parent need not consolidate if all of its subsidiaries could be excluded from consolidation — for example on materiality grounds (though several individually immaterial subsidiaries can be material in aggregate) or where severe long-term restrictions prevent the parent exercising its rights.

Note that a parent required (or choosing) to prepare consolidated accounts will generally also need those accounts audited unless a group-level exemption applies — small group audit exemption and small group consolidation exemption usually stand or fall together.

Practical points for SME groups

• Re-run the size test this year. With the thresholds up roughly 50%, a group audited for years may now be exempt from both audit and consolidation. The saving in fees and management time can be significant — but check the two-year rule and the transitional provision carefully before switching off.
• Watch the aggregation trap. Owner-managers often think of each company separately. The audit exemption looks at the whole group, including the holding company and any dormant or overseas entities. One acquisition can tip the group over the limits and drag every company into audit.
• Think before using the parent guarantee. Section 479A can remove audits from mid-sized subsidiaries, but the parent takes on enforceable liability for the subsidiary's year-end obligations, and the paperwork must be filed correctly every year. Many groups conclude the audit is the cheaper risk.
• An audit is not always a burden. Lenders, potential acquirers and larger customers often value audited figures. If a sale or refinancing is on the horizon, voluntarily keeping the audit can smooth due diligence.
• Holding company structures interact with all of this. If you are weighing up a group structure, our guide to holding company benefits covers the tax and commercial angles — but factor the audit and consolidation position into the decision too.

A worked example

Take a trading group: a holding company, a trading subsidiary with £13m turnover, £5m gross assets and 60 staff, and a property subsidiary with £1m turnover and £3.5m of assets. Aggregated gross, the group has about £14m turnover (within £18m), £8.5m assets (within £9m) and around 62 employees (over 50). It fails the employee test but passes the other two — so the group is small, the parent is exempt from preparing consolidated accounts, and each company can claim audit exemption (assuming no ineligible members, no 10% shareholder demand and no lender requirement). Under the pre-2025 limits, the same group would have failed the turnover and balance sheet tests and needed both consolidation and audits throughout.

The rules are mechanical but the edge cases — mixed net/gross calculations, mid-year acquisitions, overseas parents, the two-year rule — are where mistakes happen, and filing unaudited accounts when an audit was required is a breach of the Companies Act. If you would like us to check your position, or to help you step out of (or into) audit in an orderly way, book a free consultation with one of our chartered accountants. We prepare statutory and group accounts for companies across Medway and Kent — see our accountants in Medway page.