Audit requirements can often feel complex, especially for small and medium-sized businesses. However, understanding whether your company must have an audit, and how new thresholds in 2025 affect that is crucial for compliance and planning.

The UK government’s updated audit thresholds for 2025 are designed to reduce the administrative burden on smaller businesses while maintaining financial transparency. Whether you’re a company director, small business owner, or part of a growing enterprise, this guide will explain everything you need to know in plain English.

If you need personal advice tailored to your company’s structure and size, our experienced accountants in London can help ensure you meet all statutory requirements efficiently.

Understanding Audit Thresholds and Exemptions in the UK

In the UK, not every company is legally required to have an external audit. Audit thresholds determine which businesses are exempt based on their size, turnover, and financial position.

Understanding where your company sits against these limits is essential to remain compliant with the Companies Act 2006 and to plan for future growth.

What Is an Audit and What Is Its Purpose?

A company audit is an independent review of financial statements conducted by a qualified external auditor. Its main purpose is to verify that the company’s accounts give a true and fair view of its financial position.

Audits help ensure accuracy, prevent fraud, and build trust with stakeholders such as investors, lenders, and shareholders. While small companies may qualify for audit exemption, voluntary audits can still be beneficial for credibility and financial oversight.

What Is the Audit Threshold?

In the UK, an audit threshold is a financial benchmark used to decide whether a company must have its annual accounts audited. If a business exceeds these limits, it becomes legally required to undergo a statutory audit under the Companies Act 2006.

From April 2025, the updated audit threshold applies when a company meets two or more of the following:

Annual turnover above £15.6 million
Balance sheet total (assets) over £7.8 million
Average of more than 50 employees during the financial year

If a business meets or exceeds these limits for two consecutive financial years, it will need an independent audit of its accounts.

Are Small Companies Exempt from Audits?

Yes, most small companies in the UK are exempt from statutory audit requirements, provided they stay below the current audit thresholds. This exemption aims to reduce administrative costs for smaller businesses while maintaining transparency.

However, some companies cannot claim exemption, for example, those in regulated industries like financial services, insurance, or charities that exceed income thresholds.

What Type of Companies Must Have an Audit?

The following businesses are usually required by law to have an audit:

Public limited companies (PLCs)
Companies in regulated industries (e.g., banks, insurance firms, investment businesses)
Subsidiaries of larger groups that do not qualify for exemption
Companies exceeding the audit thresholds for two consecutive years

Additionally, any company may opt for a voluntary audit if its shareholders or lenders request one, even if it’s technically exempt.

Changes to Audit Thresholds in 2025

The UK government has announced new audit threshold increases effective from 6 April 2025, allowing more small and medium-sized businesses to qualify for exemption.

These changes are designed to align with inflation, simplify reporting, and reflect the growing number of small businesses in the UK.

Overview of the New Threshold Changes

From 2025, the thresholds for small and micro companies will rise significantly. The goal is to make the audit exemption available to more small businesses and reduce compliance costs.

The new limits follow consultation from the Department for Business and Trade (DBT) and recommendations from the Financial Reporting Council (FRC), ensuring the thresholds remain proportionate to company size and market conditions.

Micro Companies

Micro companies are the smallest category of incorporated businesses. They typically have simple structures and limited financial activity.

Under the new 2025 rules, a company qualifies as “micro” if it meets at least two of the following:

Turnover of up to £1 million (up from £632,000)
Balance sheet total of up to £500,000 (up from £316,000)
Average of up to 10 employees

Micro companies remain exempt from audits unless they are part of a larger group or specifically required to have one by regulation or shareholders.

Small Companies

For small companies, the thresholds will also increase from April 2025. To qualify as “small,” a company must meet at least two of the following criteria:

Turnover of up to £15 million (previously £10.2 million)
Balance sheet total of up to £7.5 million (previously £5.1 million)
Average of up to 50 employees

These changes will exempt thousands of additional small companies from mandatory audits, helping them save time and money while still maintaining proper accounting standards.

Other Proposed Changes

Beyond the main threshold increases, the government is also considering further reforms to simplify company reporting.

This could include:

Streamlining filing requirements for small and micro entities
Introducing clearer online reporting tools through Companies House
Enhancing transparency for companies that choose voluntary audits

Businesses should stay informed through updates on GOV.UK’s audit guidance.

Audit Thresholds Effective from 6 April 2025

To summarise, from 6 April 2025, the new thresholds will be:

Company Size	Turnover	Balance Sheet Total	Employees
Micro	Up to £1m	Up to £0.5m	Up to 10
Small	Up to £15m	Up to £7.5m	Up to 50

If your company exceeds two or more of these limits for two consecutive years, it will need to appoint an auditor and submit audited financial statements.

The Two-Year Rule for Audit Qualification

The two-year rule determines whether a company’s size classification (micro, small, medium, or large) applies for audit purposes. This rule prevents frequent changes in reporting requirements due to short-term fluctuations in business size.

What Is the Two-Year Rule and How Does It Work?

Under the two-year rule, a company must meet the size criteria for two consecutive financial years to either qualify for or lose its audit exemption.

For example:

If your company first exceeds the small-company thresholds in 2024 and again in 2025, it will require an audit for the 2025 financial year.
If it falls back below the thresholds for two consecutive years, it may regain exemption status.

This ensures consistency and avoids confusion when business performance changes slightly year to year.

When Does the Two-Year Rule Not Apply?

The two-year rule does not apply in certain circumstances, such as:

Newly incorporated companies’ size is assessed from their first accounting period.
Group subsidiaries whose parent company’s classification can override their own.
Mergers, acquisitions, or restructuring size may be reassessed immediately following major structural changes.

In these cases, companies may need to reassess their audit requirements more frequently.

Planning Ahead If You’re Near the Threshold

If your business is close to the new audit thresholds, planning ahead can save both time and money. Managing your financial growth carefully ensures you stay compliant while avoiding unnecessary audits or penalties.

Strengthening Internal Controls

As companies grow, internal controls become more important. Implementing strong financial oversight, such as segregation of duties, regular reconciliations, and documented procedures, prepares your business for a potential audit and builds investor confidence.

Monitoring Your Company’s Financial Position

Directors should regularly review turnover, assets, and staffing levels throughout the year. Monitoring these indicators helps predict whether your company might cross an audit threshold before year-end.

Keeping clear, up-to-date records also makes it easier to provide information if an audit becomes necessary.

Considering Company Structure or Ownership Changes

Sometimes, restructuring can help manage compliance more efficiently. For instance, creating separate legal entities for different divisions or business lines may keep each below the audit limit.

However, restructuring should never be done solely to avoid audits, professional advice from a qualified accountant is essential to ensure legality and transparency.

Planning a Sale or Investment

If you’re planning to sell your business or attract new investors, a voluntary audit can increase credibility. Even if your company is exempt, having audited accounts provides reassurance to potential buyers or financial institutions.

Qualification Criteria and Limits for Audit Exemption

Audit exemptions are designed to ease the burden on smaller UK companies that meet specific size and financial limits. While every business must prepare annual accounts, not all are legally required to undergo an external audit. Knowing where your company stands against the thresholds helps avoid unnecessary costs and ensures compliance with Companies House regulations.

If you’re unsure whether your business qualifies, speaking with trusted Accountants in London can help you confirm your status and stay compliant with HMRC and audit requirements.

Audit Exemption Criteria and Financial Limits

As of April 2025, most UK private limited companies are exempt from statutory audits if they meet at least two of the following three criteria for two consecutive financial years:

Annual turnover of no more than £15.6 million
Balance sheet total of no more than £7.8 million
No more than 50 employees

If your company exceeds these limits for two years in a row, you’ll be required to have an audit. The exemption applies to small and micro-entities but not to companies in regulated industries such as banking or insurance.

Ineligibility Factors for Audit Exemption

Even if a company meets the size criteria, certain factors can disqualify it from claiming audit exemption. You’ll need an audit if:

The company is part of a public group or listed on a stock exchange
The business is involved in financial services, insurance, or pension fund management
A shareholder owning at least 10% requests an audit
The company has received public funding or grants requiring audited accounts

Additionally, dormant subsidiaries under a non-UK parent company often lose automatic exemption.

Applying for Audit Exemption

If your company qualifies, you can apply for audit exemption by including a statement in your annual accounts confirming eligibility. This declaration must state that the company qualifies as small under section 477 of the Companies Act 2006.

Companies should ensure that:

The exemption criteria are clearly met for two consecutive years
Supporting records and financial data are up to date
Directors approve and sign the balance sheet with the exemption statement

Audit Exemption for Specific Entities

Certain types of entities can also qualify for audit exemption under specific rules.

Dormant Companies

Dormant companies: those with no significant accounting transactions during the financial year are generally exempt from audits. However, they must still file annual accounts and a confirmation statement with Companies House.

Certain Charities and Non-Profit Organisations

Smaller charities may qualify for audit exemption if their annual income is under £1 million and gross assets do not exceed £3.26 million. However, they must often arrange an independent examination instead.

Impact of Brexit on Audit and Consolidation Exemptions

Brexit introduced changes to the audit landscape, particularly for UK companies with EEA subsidiaries or parent companies. Before 2021, UK subsidiaries of EEA parents could claim audit exemption under certain EU rules. Now, these exemptions have been withdrawn.

UK companies that were once covered by an EEA parent must now appoint a UK auditor or restructure their reporting arrangements to maintain compliance.

Audit Exemption and Transparency Concerns

Audit exemptions can save money and time, but they also reduce the level of external assurance on a company’s accounts. This has led to discussions around how these exemptions affect business transparency and stakeholder confidence.

Reduced Transparency and Its Implications

Without an external audit, company financials rely solely on internal reporting accuracy. This can raise questions for:

Investors or lenders reviewing financial statements
Business partners assessing creditworthiness
Potential buyers during mergers or acquisitions

Lack of audited accounts may make it harder to secure financing or build credibility, especially for growing businesses.

Why Voluntary Audits Still Matter

Even when not required, some companies choose to voluntarily undergo audits. This shows a commitment to transparency and builds trust with stakeholders.

Voluntary audits can help by:

Highlighting weaknesses in internal controls
Detecting financial or compliance risks early
Demonstrating professionalism to clients, banks, and investors

The Benefits of a Voluntary Audit

Opting for an audit voluntarily offers several tangible benefits:

Improved credibility with lenders and investors
Better governance through independent review
Early detection of accounting errors or fraud
Increased readiness for business expansion or sale

For many small UK companies, a voluntary audit is an investment in future growth rather than an unnecessary cost.

Audit Process and Timeframes

Even if an audit isn’t mandatory every year, understanding how long it takes and when it’s due helps you plan ahead.

How Often Does a Company Need an Audit?

Most companies that meet the audit requirement must undergo one every financial year. This ensures the accounts provide a fair and accurate reflection of financial performance.

How Long Does It Take to Complete an Audit?

The audit process can take anywhere between four to twelve weeks, depending on the complexity of your accounts and record-keeping quality. Smaller companies often take less time, but preparation and organisation can significantly affect the timeline.

Deadlines for Completing an Audit

UK private limited companies must file audited accounts within nine months of the financial year-end. Public companies have a shorter deadline, six months.

Late submissions may lead to penalties from Companies House and can affect your business’s credit rating.

How Changes to Audit Thresholds Impact UK Businesses

The 2025 audit threshold changes are expected to bring thousands more UK companies into the “audit exempt” category. However, this shift has both advantages and drawbacks depending on your company’s financial goals.

Financial Reporting Implications

Higher thresholds mean fewer small businesses will need statutory audits. This reduces administrative costs but also places more responsibility on directors to ensure accurate record-keeping and internal oversight.

Companies must continue to follow UK GAAP or IFRS where required and ensure director-approved accounts remain accurate and transparent.

Managing Compliance and Record-Keeping

With exemptions, directors must take even greater care to maintain compliance. Strong internal controls, proper reconciliations, and timely filings with Companies House are essential to avoid penalties.

It’s wise to:

Keep accounting software updated
Reconcile accounts monthly
Review directors’ duties under the Companies Act

Balancing Cost Savings with Transparency

While exemption reduces cost pressures, transparency remains key to business growth. Investors, lenders, and partners often prefer audited accounts, even for small firms.

Businesses should weigh:

Short-term savings from skipping audits
Long-term benefits of transparency and credibility

Keeping Track of Finances and Staying Compliant

Strong financial management is essential whether or not you need an audit. Staying organised helps you react quickly to changes in audit thresholds or reporting rules.

Tools and Best Practices for Financial Monitoring

Modern cloud-based accounting tools such as QuickBooks, Xero, or Sage make it easier to:

Track income and expenses in real time
Generate accurate reports for directors and auditors
Ensure VAT and payroll submissions are timely

Implementing monthly reconciliations and periodic financial reviews also strengthens compliance.

Seeking Professional Help with Audits and Exemptions

Working with qualified accountants ensures you meet all reporting obligations and understand how changing thresholds affect your business.

An experienced accountant can:

Review your eligibility for audit exemption
Prepare your accounts in line with UK GAAP
Assist with Companies House filings and HMRC requirements

Implementation and Next Steps

With the new audit thresholds taking effect in April 2025, preparation is key.

Preparing for the April 2025 Changes

Businesses should begin assessing their financial position now. Review the last two years’ figures to determine if your company will qualify for exemption under the new limits.

Directors should:

Evaluate turnover, assets, and staff numbers
Forecast future growth that may affect eligibility
Keep clear records to justify exemption claims

Reviewing Eligibility for Audit Exemption

If your business is growing, review your finances annually. Once you exceed the limits for two consecutive years, an audit becomes mandatory.

Failing to arrange an audit when required can result in penalties and non-compliance notices from Companies House.

Ensuring Compliance with Updated UK Audit Regulations

Even if exempt, you must still comply with:

The Companies Act 2006
UK accounting standards (UK GAAP or IFRS)
Filing deadlines set by Companies House and HMRC

Staying proactive ensures your business remains compliant, transparent, and ready for future growth.