In the UK, businesses are classified into categories, and knowing where your company fits can make a big difference to your financial obligations and reporting requirements. If your business qualifies as a small company, it can affect your tax, filing responsibilities, and even what benefits you’re entitled to. Let’s break down what it means to be a small company and how upcoming changes might impact you.
Definition of a small company
The UK defines a small company using specific criteria set out in the Companies Act 2006. Meeting this definition determines how you manage your finances, report to Companies House, and deal with HMRC. To qualify as a small company, your business must meet at least two of the following criteria:
Turnover: No more than £10.2 million.
Balance sheet total: No more than £5.1 million.
Number of employees: No more than 50.
However, big changes are coming in April 2025. These thresholds will increase to:
Turnover: No more than £15 million.
Balance sheet total: No more than £7.5 million.
Number of employees: Remaining at 50.
💡 Editor's insight: "These changes could push your company into a new category, which might mean new reporting rules or additional responsibilities. Take a moment to review the updated thresholds to see how they’ll affect you. You can read the official government statement here."
What does this mean for your business?
If your company is classified as 'small':
Easier financial reporting: Small companies are eligible for simplified accounts, such as filing abbreviated accounts with Companies House.
Tax benefits: You may be entitled to specific tax reliefs or incentives tailored to small businesses.
Fewer audit requirements: Small companies are often exempt from mandatory audits, which saves time and costs.
Why are these changes happening?
The government has introduced these changes to reflect economic growth and inflation, ensuring that the thresholds align with modern business operations. The updated criteria will allow more businesses to qualify as small, potentially reducing their administrative burden.
What should you do next?
These updates are a great opportunity to revisit your business’s classification and ensure you're set up for success. Whether you're adjusting to the new thresholds or already meeting the current criteria, staying on top of your obligations will help your company thrive.
Review your current financials: Check your turnover, balance sheet total, and number of employees to see if you’re still classified as a small company under the new rules.
Stay informed: Keep an eye on updates from HMRC and Companies House so you don’t miss important deadlines or changes.
Speak to a professional: If you’re unsure how the changes will affect you, consult with an accountant or financial advisor. They can help you navigate any new obligations or opportunities.
Micro vs Small vs Medium-sized companies
Businesses are often grouped into micro, small, and medium categories. Micro-entities are subject to simple reporting, while small companies have more obligations. Medium-sized corporations have to declare the most when it comes to finances.
Category | Turnover | Balance sheet total | Employees |
|---|---|---|---|
Micro-entity | Up to £632,000 | Up to £316,000 | Up to 10 |
Small company | Up to £10.2 million | Up to £5.1 million | Up to 50 |
Medium-sized company | Up to £36 million | Up to £18 million | Up to 250 |
Note: These thresholds will change from April 2025, be sure to check official government sources for the most up to date information.
When do you need to register a small company?
If you’re earning more than £1,000 a year from self-employment, you’ll need to register with HMRC. This threshold is known as the £1,000 trading allowance, which applies to sole traders. Once your earnings go beyond this limit, registration becomes mandatory.
For limited companies, registration with Companies House is a required first step before you can begin trading. Additionally, you must register with HMRC for Corporation Tax within three months of starting any business activity.
What information do you need to register?
Registering a limited company can be completed online through the Companies House website. To register a small company, you’ll need:
A unique company name
An official registered address in the UK
Details of at least one director and, if applicable, one shareholder
A description of the company’s activities (using a SIC code)
The memorandum and articles of association, outlining your company’s rules
Information about the company’s share structure and how they have been distributed
Other business types
The UK recognises further classifications alongside small companies. These include micro-entities and dormant companies.
What is a micro-entity?
A micro-entity is the smallest category of business, meeting two of these three criteria:
Turnover of no more than £632,000.
Balance sheet total of no more than £316,000.
No more than 10 employees.
Micro-entities benefit from simpler reporting requirements. These include simplified financial statements and limited notes on accounts. You still need to meet tax obligations and comply with business laws.
What is a dormant company?
You register a dormant company with Companies House but it does not usually take part in any business activity or earn income. Dormant companies:
Must file annual confirmation statements and dormant company accounts.
Are exempt from full financial reporting but must keep company details up to date.
Are often used to protect a business name or for future business activities.
FAQs
What are the requirements to start a business in the UK?
Starting a business involves selecting a structure and registering with HMRC. If needed, you will also register with Companies House. Depending on the industry of your business, you may need a licence, specific insurance, and VAT registration.
What are the legal obligations of a business?
All businesses must keep accurate records and pay taxes. You should follow employment, data protection, and health and safety regulations. Limited companies have extra filing obligations with Companies House.
Final thoughts
Understanding how your small company is defined will help you make informed decisions about your business. Whether you’re registering a micro-entity or a medium-sized business, knowing the criteria can save time and make sure you stay within the law. If you need legal help, you get in touch with us today and one of our small business lawyers can help when starting your small company.
References
Corporation Tax: Overview by Gov.UK
Register your company by Gov.UK
UK company size thresholds to increase by ICAEW (The Institute of Chartered Accountants in England)
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.