Who Qualifies as a Micro-Entity in the UK?

A UK limited company may qualify as a micro-entity if it meets specific financial and employee thresholds and is not excluded from the micro-entity accounting regime. The classification allows eligible businesses to prepare simpler statutory accounts and benefit from certain reporting exemptions. 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 three conditions:

• Annual turnover of no more than £1 million.
• A balance sheet total of no more than £500,000.
• An average of no more than 10 employees.

Meeting these thresholds is only part of the test. The company must also satisfy the relevant qualification rules, including rules that apply over consecutive financial years, and must not fall within an excluded category. For small businesses, startups and overseas founders operating UK companies, understanding micro-entity status can help reduce unnecessary reporting work while keeping statutory filings accurate.

What Is a Micro-Entity?

A micro-entity is a very small company that qualifies to use the micro-entity accounting provisions under UK company law. The regime is designed to make financial reporting more proportionate for smaller businesses. Eligible companies can prepare accounts using simplified requirements and generally file less financial information publicly with Companies House than larger businesses.

Micro-entity status does not mean that a company is exempt from preparing accounts. Directors must still ensure that accounts are prepared for the relevant financial year, approved appropriately and filed by the applicable deadline. A micro-entity can also be an active trading business. It may sell products, provide services, employ staff, own equipment and generate profits. Dormancy is a separate concept that concerns a company's accounting transactions rather than its size.

For example, a small digital consultancy with annual turnover of £250,000, assets of £80,000 and three employees could qualify as a micro-entity if it meets the other legal conditions. By contrast, a company with no trading activity does not automatically qualify as a micro-entity simply because it has no revenue. It must still satisfy the relevant size criteria, while its eligibility to file dormant accounts is assessed separately.

What Are the UK Micro-Entity Thresholds?

The thresholds depend on when the company's accounting period begins. This is important because the financial limits increased for accounting periods beginning on or after 6 April 2025.

Thresholds for accounting periods beginning on or after 6 April 2025

A company generally needs to meet at least two of the three conditions, not all three.

Thresholds for earlier accounting periods

For accounting periods beginning between 30 September 2013 and 5 April 2025, the previous thresholds generally apply:

The relevant figures are determined by the start date of the accounting period, not simply the date the accounts are filed. For example, if a company's financial year began on 1 January 2025, the earlier thresholds generally apply to that period, even if its accounts are filed after 6 April 2025.

How Does the Two-Out-of-Three Test Work?

The two-out-of-three test means a company can qualify even if one of its measurements exceeds the relevant limit. Consider three examples for accounting periods beginning on or after 6 April 2025.

Example 1: A company that meets all three conditions

A software consultancy has:

• Turnover of £700,000.
• A balance sheet total of £350,000.
• Eight employees on average.

The company meets all three micro-entity conditions. Assuming it satisfies the other requirements, it qualifies on the size test.

Example 2: A company that exceeds one threshold

An online retailer has:

• Turnover of £900,000.
• A balance sheet total of £620,000.
• Seven employees on average.

Its balance sheet total exceeds £500,000. However, its turnover and average employee numbers are within the limits. It therefore meets two of the three conditions and may qualify as a micro-entity, subject to the remaining rules.

Example 3: A company that exceeds two thresholds

A technology business has:

• Turnover of £1.4 million.
• A balance sheet total of £700,000.
• Nine employees on average.

The business meets only the employee condition. It therefore fails the two-out-of-three test for micro-entity status. It may still qualify as a small company because the small-company thresholds are higher. That classification must be assessed separately. These examples show why directors should examine all three measurements rather than assuming that exceeding one limit automatically disqualifies the company.

What Counts as Turnover, Balance Sheet Total and Employees?

Correctly measuring the three criteria is essential. The figures should come from the company's accounting records and be calculated under the applicable rules.

Annual turnover

Turnover generally represents revenue generated from the company's ordinary activities during the financial year, after accounting for relevant adjustments such as discounts and excluding VAT.

It is not the same as profit. A company with £900,000 in turnover and £850,000 in expenses has turnover of £900,000, even if its profit is relatively small. Similarly, the amount of cash held in the company's bank account is not a substitute for turnover.

Balance sheet total

The balance sheet total is generally the aggregate amount of assets shown on the company's balance sheet. Depending on the business, these may include cash, trade debtors, stock, equipment and other assets. It is not simply the company's net assets or the amount of money available to spend.

For example, a company may have £200,000 in cash but also own equipment and have outstanding customer invoices. Its balance sheet total may therefore be considerably higher than its bank balance.

Average number of employees

The employee test uses the average number of employees during the financial year, calculated in accordance with the relevant statutory rules. It is not necessarily the number of people working for the company on the final day of the year.

A company that employed 15 people for part of the year and fewer people later should calculate the relevant average rather than relying on a single headcount. Directors should use reliable payroll and accounting records when determining whether the company meets this condition.

Must a Company Qualify as a Micro-Entity Every Year?

Not necessarily. The rules take account of the company's circumstances over consecutive financial years. A company will generally qualify in its first financial year if it meets the applicable conditions for that year. In subsequent years, it will normally need to meet the size criteria in both the current financial year and the preceding financial year to qualify or cease to qualify, subject to the statutory rules.

This prevents a company from automatically changing classification because of a small, temporary movement above or below a threshold.

Example: A growing startup

Suppose a company qualifies as a micro-entity in its first year. In its second year, turnover rises above £1 million, but its balance sheet total and employee numbers remain within the micro-entity limits. The company still meets two of the three conditions for the second year. It may therefore continue to qualify, assuming the other requirements are satisfied.

If its turnover, balance sheet total and employee numbers all rise above their respective limits, it would no longer meet the two-out-of-three test. However, the consecutive-year rules may affect when it loses access to the regime. Companies experiencing rapid growth should review their status annually rather than assuming that a single year's figures settle the question.

Which Companies Cannot Use the Micro-Entity Regime?

Even if a company meets the financial thresholds, it may be excluded from preparing and filing micro-entity accounts. Companies House guidance identifies several categories that cannot use the regime, including:

• Public limited companies.
• Overseas companies and certain unregistered companies.
• Charitable companies.
• Companies excluded from the small companies regime.
• Certain parent companies and subsidiaries involved in group accounts.
• Certain investment, financial holding, credit institution and insurance businesses.

The exact exclusions depend on the company's legal status and circumstances during the financial year.

What about companies in a group?

Group structure can make eligibility more complicated. A parent company cannot assume it qualifies as a micro-entity simply because its own turnover, assets and employee numbers are below the thresholds. The size of the group and whether consolidated accounts are prepared can affect eligibility.

Similarly, a company's accounts may be included in consolidated group accounts, which can prevent it from using the micro-entity provisions. Founders who operate multiple UK companies, or who have a UK subsidiary owned by an overseas parent, should check these rules before choosing an accounts format.

What Are the Benefits of Micro-Entity Status?

The main advantage is simplified financial reporting. Eligible micro-entities can generally:

• Prepare accounts using the micro-entity accounting provisions.
• File a simplified balance sheet with Companies House.
• Omit the profit and loss account from their current public Companies House filing.
• Avoid filing a directors' report, where the applicable exemption is available.
• Claim audit exemption if they meet the relevant requirements.

These benefits can reduce administrative work and limit the amount of financial information available on the public register. However, micro-entity status does not remove the need to keep proper accounting records or prepare accounts for the company's members. Nor does it automatically exempt the company from Corporation Tax, VAT, PAYE or other obligations that apply to its activities.

Companies House has also announced changes 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 its public disclosure. Directors should monitor official guidance as the implementation details develop.

Does a Micro-Entity Need an Accountant?

There is no general rule requiring every micro-entity to appoint an external accountant. Directors remain responsible for ensuring that the company's accounts are accurate, prepared under the correct framework and filed on time.

Some businesses can manage straightforward accounts internally, particularly where transactions are limited and records are well organised. Others may benefit from professional assistance, especially where they have:

• Multiple income streams or complex expenses.
• Shareholder loans or investment transactions.
• Overseas operations or cross-border transactions.
• Group company relationships.
• Questions about audit exemption or accounting treatment.
• Uncertainty about which size thresholds apply.

A professional accountant can help establish whether the company qualifies as a micro-entity and whether the simplified reporting provisions are appropriate. For founders managing UK companies from abroad, it is particularly important to maintain reliable records and understand that company size, tax residence, trading activity and filing obligations are separate questions. IncorpUK, a UK company formation and management platform for global founders, operates in a landscape where these distinctions matter throughout a company's lifecycle.

How to Check Whether Your Company Qualifies

Before preparing annual accounts, follow these practical steps:

1. Confirm the accounting period start date. This determines which thresholds apply.
2. Calculate annual turnover. Use the company's accounting records rather than its profit or cash balance.
3. Calculate the balance sheet total. Review the assets recorded in the accounts.
4. Determine average employee numbers. Use records covering the financial year.
5. Apply the two-out-of-three test. Establish whether at least two thresholds are met.
6. Review the previous year's status. Apply the rules governing consecutive financial years.
7. Check exclusions. Consider whether the company is a parent, subsidiary, charity, public company or falls into another excluded category.
8. Confirm the filing requirements. Check what must be prepared for members, what must be delivered to Companies House and whether audit exemption is available.

If the company falls outside the micro-entity regime, it may still qualify as a small company and use the small companies accounting provisions.

Frequently Asked Questions

1. What is the turnover limit for a UK micro-entity?

For accounting periods beginning on or after 6 April 2025, the turnover limit is £1 million. The company must also meet at least one of the other two size conditions and satisfy the remaining eligibility requirements.

2. Does a micro-entity have to meet all three thresholds?

No. It generally needs to meet at least two of the three conditions covering turnover, balance sheet total and average employees.

3. Can a company with more than 10 employees qualify as a micro-entity?

Potentially. If the company exceeds the employee limit but meets both the turnover and balance sheet thresholds, it may satisfy the two-out-of-three test, subject to the other rules.

4. Can a dormant company qualify as a micro-entity?

Yes, a dormant company may also meet the micro-entity size criteria. However, dormant status and micro-entity eligibility are separate tests. A qualifying dormant company may be able to file simpler dormant accounts.

5. Can a UK subsidiary of an overseas company use micro-entity accounts?

Not automatically. Group structure, consolidated accounts and the statutory exclusions can prevent a subsidiary from using the micro-entity provisions. The company's circumstances should be reviewed before filing.

6. Does a micro-entity need to file a profit and loss account?

Under current arrangements, an eligible micro-entity generally prepares a profit and loss account for its members but can omit it from its public Companies House filing. From 1 April 2028, micro-entities will be required to deliver a copy to Companies House, with an option to opt out of public disclosure.

7. Are micro-entities exempt from audit?

Eligible micro-entities can generally claim audit exemption under the rules for small companies. Certain companies must still have an audit, and other statutory conditions apply.

8. What happens if my company grows beyond the micro-entity limits?

It may need to use the small companies regime or another accounting framework, depending on its size, consecutive-year qualification and legal structure. Exceeding one threshold does not automatically mean the company loses micro-entity status.

Conclusion

A UK company generally qualifies as a micro-entity if it meets at least two of the three statutory conditions for turnover, balance sheet total and average employees, and is not excluded from the regime.

For accounting periods beginning on or after 6 April 2025, those limits are £1 million in turnover, £500,000 in balance sheet total and an average of 10 employees. Earlier accounting periods may be subject to lower thresholds.

The practical task is to use the correct figures, apply the rules for consecutive years and check the company's legal and group structure before filing. Micro-entity status can simplify statutory reporting, but it does not eliminate the company's responsibility to prepare accurate accounts and meet its Companies House and HMRC obligations.