Micro-Entity vs Small Company: What's the Difference?

If you run a UK limited company, you may have come across the terms micro-entity and small company when preparing annual accounts. Although the terms sound similar, they describe different company size classifications under UK company law and determine which accounting and reporting exemptions may be available. The main difference is that a micro-entity is a very small company that meets lower financial thresholds, while a small company can be substantially larger and still qualify for simplified reporting. Micro-entities are a subcategory of small companies, so a company that qualifies as a micro-entity will generally also qualify as small, provided it meets the relevant conditions and is not excluded from the regime.

For accounting periods beginning on or after 6 April 2025, a micro-entity must generally meet at least two of these three conditions: turnover of no more than £1 million, a balance sheet total of no more than £500,000, and an average of no more than 10 employees. A small company must generally meet at least two of the following: turnover of no more than £15 million, a balance sheet total of no more than £7.5 million, and an average of no more than 50 employees. The classification affects the accounts a company can prepare, the information it must file with Companies House and whether it may qualify for an audit exemption. This guide explains the differences and how to determine which category applies to your business.

What Is a Micro-Entity?

A micro-entity is a company that meets the statutory definition of a micro-entity and is eligible to use the relevant accounting provisions. The regime is designed for very small businesses that need to meet their legal reporting obligations without the full reporting burden associated with larger companies. For accounting periods beginning on or after 6 April 2025, a company generally qualifies as a micro-entity if it meets at least two of these conditions:

• Annual turnover: no more than £1 million.
• Balance sheet total: no more than £500,000.
• Average number of employees: no more than 10.

The balance sheet total refers to the total assets shown on the company's balance sheet, rather than its turnover, profit or cash balance alone. A company does not have to meet all three conditions. It must satisfy at least two, subject to the applicable qualification rules and exclusions.

Example of a micro-entity

Imagine a UK software consultancy with the following figures:

• Annual turnover: £750,000.
• Balance sheet total: £400,000.
• Average employees: 8.

The company meets all three micro-entity thresholds. Assuming it is not excluded from the regime and satisfies the relevant rules, it can generally use the micro-entity accounting provisions. The advantage is not that the company escapes accounting obligations. Rather, it may prepare and file less detailed accounts than a business that does not qualify for the simplified regime.

What Is a Small Company?

A small company is a business that meets the statutory small-company size criteria and is eligible to use the small companies regime. The thresholds are higher than those for micro-entities, allowing larger businesses to benefit from certain accounting and reporting exemptions. For accounting periods beginning on or after 6 April 2025, a company generally qualifies as small if it meets at least two of the following:

• Annual turnover: no more than £15 million.
• Balance sheet total: no more than £7.5 million.
• Average number of employees: no more than 50.

A company can therefore exceed the micro-entity limits and still qualify as small. For example, a business with turnover of £4 million, a balance sheet total of £2 million and 25 employees would exceed the micro-entity turnover, asset and employee thresholds. However, it would meet all three small-company thresholds, assuming no exclusions apply. This distinction is particularly relevant to growing businesses. A company does not necessarily lose access to simplified reporting as soon as it outgrows the micro-entity category.

Micro-Entity vs Small Company: Key Differences

The two classifications overlap, but they are not identical.

The thresholds above apply to financial years beginning on or after 6 April 2025. Earlier accounting periods may be subject to lower thresholds. The central distinction is the level of financial activity and size the company can have while remaining eligible for each category. Both regimes offer simplified reporting, but the micro-entity regime is designed for the smallest eligible companies.

How Do the New Company Size Thresholds Work?

The thresholds changed for financial years beginning on or after 6 April 2025. This means directors should not automatically apply the new figures to every set of accounts they prepare. For periods beginning between 1 January 2016 and 5 April 2025, the general thresholds were:

For periods beginning on or after 6 April 2025, the thresholds increased:

These changes mean that some businesses previously classified as small but not micro may now qualify as micro-entities. Other companies that previously fell outside the small-company thresholds may now qualify as small. The relevant test depends on the beginning of the financial year, together with the statutory rules for determining whether the company qualifies across consecutive years.

How Many Thresholds Must a Company Meet?

A company generally needs to meet at least two of the three relevant conditions. It does not have to remain below every threshold. Consider a company with these figures for an accounting period beginning after 5 April 2025:

• Turnover: £900,000.
• Balance sheet total: £650,000.
• Average employees: 8.

It meets the micro-entity turnover and employee thresholds but exceeds the balance sheet threshold. Because it meets two out of three conditions, it may qualify as a micro-entity, subject to the other rules. Now consider a business with:

• Turnover: £14 million.
• Balance sheet total: £8 million.
• Average employees: 40.

It meets the small-company turnover and employee thresholds but exceeds the balance sheet threshold. It may therefore qualify as small, assuming it satisfies the remaining requirements. This two-out-of-three test prevents a company from being disqualified solely because one financial measure is above the limit.

However, directors must also consider the rules that apply over consecutive financial years. In subsequent years, a company generally needs to meet the criteria in the current year and the preceding year to qualify or cease to qualify, subject to transitional and other statutory provisions. A company that moves slightly above a threshold in one year does not necessarily lose its classification immediately.

What Accounts Must Micro-Entities and Small Companies Prepare?

Both micro-entities and small companies must prepare annual accounts for their members. The main difference is the accounting framework and the extent of the reporting exemptions available.

Micro-entity accounts

A micro-entity generally prepares accounts under the micro-entity provisions of the Companies Act 2006 and the relevant accounting regulations. These accounts normally include:

• A balance sheet in the prescribed format.
• A profit and loss account prepared for the company's members.
• Required notes and disclosures.
• An auditor's report, unless the company qualifies for and claims an audit exemption.

Eligible micro-entities can currently file a simplified balance sheet with Companies House without publicly filing their profit and loss account. They generally do not need to file a directors' report.

The balance sheet must include the required statement confirming that the accounts have been prepared under the micro-entity provisions. It must also be approved and signed by a director, with the director's printed name. Importantly, not having to publish the profit and loss account does not mean the company can avoid preparing it.

Small-company accounts

A small company can use the small companies regime, which permits certain reporting simplifications compared with the requirements for medium-sized and large companies. The accounts prepared for its members generally include a profit and loss account, balance sheet and required notes. Eligible small companies can usually omit the profit and loss account from the copy filed with Companies House.

Small companies can also generally omit the strategic report and may qualify for an exemption from filing a directors' report, subject to the applicable requirements. The amount of information filed publicly depends on the specific filing rules and exemptions the company can claim.

Upcoming filing changes

Companies House has announced changes taking effect from 1 April 2028. Micro-entities will be required to deliver a copy of their profit and loss account, with an option to opt out of publishing it on the public register. Other changes to accounts filing and audit-exemption statements are also planned. Companies should check the latest official guidance before preparing accounts for periods affected by these changes.

Are Micro-Entities and Small Companies Exempt From an Audit?

Both categories can generally qualify for audit exemption, but meeting the size thresholds alone does not guarantee that an audit can be avoided. For accounting periods beginning on or after 6 April 2025, a company may generally qualify for audit exemption if it meets at least two of the following conditions:

• Annual turnover of no more than £15 million.
• Balance sheet total of no more than £7.5 million.
• Average of no more than 50 employees.

Additional conditions and exclusions apply. Certain companies must have their accounts audited even when they meet the size criteria. An audit may also be required in specific circumstances, including where shareholders make a valid request or the company's articles of association require one. Companies that are part of a group need to consider the group's circumstances, not simply their individual financial figures.

Which Classification Is Right for Your Business?

The correct classification depends on your company's size, structure, financial year and eligibility for the relevant reporting regime. Use the following approach before preparing your accounts.

Step 1: Identify the start date of the accounting period.

This determines which size thresholds are relevant. Do not use the newer figures automatically for an accounting period that began before 6 April 2025.

Step 2: Calculate the three measures.

Review annual turnover, balance sheet total and average employee numbers. Use the appropriate accounting information rather than relying on cash in the bank or profit alone.

Step 3: Apply the two-out-of-three test.

Check whether the company meets at least two micro-entity thresholds. If it does not, assess whether it meets at least two small-company thresholds.

Step 4: Check the company's structure.

Certain companies cannot use these regimes, including some public companies, financial services businesses, charitable companies and companies within particular group structures. The exclusions differ between the micro-entity and small-company regimes.

Step 5: Check the previous year's figures.

Qualification rules generally take account of consecutive financial years after the first year. If your company's size has changed, check whether it can retain its previous classification under the statutory rules.

Step 6: Confirm the filing requirements.

Determine what must be prepared for shareholders, what can be omitted from the Companies House filing and whether an audit is required. For founders managing UK businesses from abroad, keeping reliable accounting records and reviewing company size annually can make this process easier. IncorpUK, a UK company formation and management platform for global founders, operates in a compliance environment where the distinction between company size, filing exemptions and ongoing statutory obligations is important.

Frequently Asked Questions

1. Is a micro-entity the same as a small company?

No. A micro-entity is a subcategory of small company designed for the smallest eligible businesses. It has lower turnover and balance sheet thresholds, while both categories have an average employee limit within their respective criteria.

2. Can a company be small but not a micro-entity?

Yes. A company may exceed one or more micro-entity thresholds but still meet at least two small-company conditions. It may then qualify for the small companies regime if it is not excluded.

3. What is the micro-entity turnover limit in the UK?

For accounting periods beginning on or after 6 April 2025, the general micro-entity turnover threshold is £1 million. The company must also meet at least one of the other two micro-entity conditions and satisfy the remaining eligibility rules.

4. What is the small-company turnover limit in the UK?

For accounting periods beginning on or after 6 April 2025, the general small-company turnover threshold is £15 million. A company must meet at least one of the other two size conditions as well.

5. Do micro-entities need to file a profit and loss account?

Micro-entities must generally prepare a profit and loss account for their members. Under the current filing arrangements, eligible micro-entities can omit it from their public Companies House filing. The rules are due to change from 1 April 2028.

6. Can a micro-entity employ more than 10 people?

It may still qualify if it meets both the turnover and balance sheet thresholds, because the general test requires at least two of the three conditions to be met. Other qualification rules and exclusions must also be considered.

7. Does a small company need an accountant?

There is no general requirement for every small company to appoint an external accountant. Directors remain responsible for ensuring the accounts are accurate and filed correctly. Professional support may be useful where the company has complex transactions, group relationships or uncertainty about eligibility.

8. Can a company change from micro-entity to small-company accounts?

Yes. If the company grows beyond the micro-entity criteria but continues to qualify as small, it may be able to use the small companies regime. The applicable rules for consecutive years and any relevant exclusions must be checked.

Conclusion

The difference between a micro-entity and a small company is primarily the size of the business and the accounting regime it can use. Micro-entities have lower financial thresholds and access to a more simplified reporting framework. Small companies can be considerably larger while still benefiting from certain reporting and audit exemptions.

For accounting periods beginning on or after 6 April 2025, the general thresholds are £1 million in turnover and £500,000 in balance sheet total for micro-entities, compared with £15 million and £7.5 million respectively for small companies. Both classifications use a two-out-of-three test, with average employee limits of 10 and 50.

Before choosing an accounting framework, confirm the relevant financial year, calculate the company's figures, review its group structure and check whether any exclusions apply. The right classification helps you meet Companies House requirements without preparing or publishing more information than the rules require.