Contents
- What changed
- Why this is landing now, not in 2025
- What moves off your audit list
- What doesn't change
- Your fee mix and firm value
- What to do before December
- Questions
General information for practice owners, accurate as of 2 November 2026. Figures are drawn from the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 and published government guidance; rules can change after this date, so take your own advice before acting on any client's behalf.
The UK's company size thresholds went up by roughly 50% for financial years beginning on or after 6 April 2025. When the change was announced in December 2024, the effective date was still well over a year away. It is not any more. For any practice with a calendar year-end client base, the first accounting periods caught by the new rules end on 31 December 2026 — the files your team is about to start planning. March year-end clients follow close behind in their 2026/27 accounts. If your audit list hasn't been reviewed against the new numbers yet, this is the piece to do it from.
What changed
A company or LLP is classified by meeting at least two of three tests: turnover, balance sheet total, and average employees. The thresholds for each band have risen as follows.
| Band | Turnover | Balance sheet total | Employees |
|---|
| Micro | up to £1m | up to £500k | up to 10 |
| Small | up to £15m | up to £7.5m | up to 50 |
| Medium | up to £54m | up to £27m | up to 250 |
| Large | over £54m | over £27m | over 250 |
The small company turnover limit alone has moved from £10.2m to £15m. The government has said the uplift is designed to offset inflation since the thresholds were last set in 2013, and estimates it delivers a deregulatory saving to business of more than £240m a year. For a practice, the more useful fact is simpler: a meaningful slice of your existing audit book is now going to test as small, or even micro, for the first time.
Why this is landing now, not in 2025
The rules apply to financial years beginning on or after 6 April 2025, not accounts filed after that date. A company with a 31 December year end and a financial year that began on 1 January 2025 doesn't qualify — that year started before the cut-off. The first calendar year-end period that does is the one beginning 1 January 2026, ending 31 December 2026. That's why calendar year-end clients are first affected in their December 2026 accounts, even though the regulations are nearly two years old.
There's a second reason it arrives in one go. Company size normally only changes after a client meets the new criteria in two consecutive years, so the effect would otherwise phase in slowly through 2027 and 2028. A transitional provision in the 2024 regulations removes that delay: when working out whether a client qualifies for a financial year beginning on or after 6 April 2025, the new thresholds are treated as if they had already applied in the previous year too. In practice, a client can drop a size band and lose its audit requirement in the very first year the new rules bite; it does not have to wait for a second qualifying year. The change arrives as a single step. It does not phase in slowly.
What moves off your audit list
The statutory audit exemption is tied to the small company threshold, so it rose with it. A company meeting two of the new small-company tests is exempt from a statutory audit on size grounds alone. Government estimates published alongside the regulations put the scale of the reclassification at roughly 113,000 companies and LLPs moving from small to micro, 14,000 moving from medium to small, and around 5,000–6,000 moving from large to medium, across the whole UK company population. Not every one of those was previously audited — plenty of small companies were already exempt — but every client that moves down a band is a client worth re-checking, because some of them were being audited for reasons that may no longer apply.
What doesn't change
Three things override the size exemption, and all three need checking before you tell a client their audit is ending:
- Group membership. A subsidiary can test as small on its own figures and still require an audit if the group it belongs to doesn't qualify as small on a consolidated basis.
- Shareholder demand. Shareholders holding 10% or more of the shares, or of a class of shares, can formally require an audit even where the company is exempt on size.
- Third-party requirements. A bank covenant, a lease, a grant condition or an investor agreement can make an audit a contractual requirement regardless of what company law says.
There's also a judgement call most practices underweight: some clients want to keep a voluntary audit even once they're exempt, because a lender, a potential buyer, or a nervous director values the assurance. Losing an audit client isn't automatic just because the numbers say they could stop.
Worked example — illustrative
Take a fictional client, Riverside Joinery Ltd, year end 31 December. For its 2025 accounts (year beginning 1 January 2025) it tested as medium: turnover £13.4m, balance sheet total £6.1m, 58 employees — and had a statutory audit as part of that classification, costing around £9,000 a year in fees.
For its 2026 accounts (year beginning 1 January 2026, the first year caught by the new rules), the same figures are tested against the new bands. Turnover £13.4m is under the new £15m small-company limit; balance sheet total £6.1m is under £7.5m; and 58 employees is over the new 50-employee small-company limit but the company only needs to meet two of three tests, so it qualifies as small. Because of the transitional provision, it qualifies from this first year, not after two years of meeting the test. Riverside is now audit-exempt on size grounds, provided no group, shareholder or lender override applies — a potential £9,000-a-year swing in what the firm bills that one client, in either direction depending on what replaces the audit fee.
Your fee mix and firm value
If a meaningful share of your audit work sits in the £10m–£20m turnover range, this isn't a one-off administrative task — it's a change to your revenue mix that plays out through 2026 and into 2027 as more year ends roll through. Audit fees and compliance fees aren't priced or valued the same way by a buyer. A firm with a stable block of statutory audit work has historically been able to point to that as recurring, low-churn revenue; if a chunk of it is about to become optional, a buyer doing diligence on your firm will ask what replaces it, and whether you've already had that conversation with affected clients or whether it's still sitting as a surprise. Firms that get ahead of this — converting departing audit fees into assurance reviews, advisory retainers or management accounts work — protect both the client relationship and the number a buyer is willing to put on it. Firms that wait for clients to ask "do I still need this?" tend to just lose the fee. See our piece on audit registration and the control test for more on how a buyer looks at audit fees when pricing a firm.
What to do before December
A practical sequence for the next few weeks:
- Pull the numbers. List every audit client with turnover under roughly £16m or balance sheet total under £8m. Check all three tests against the new bands; turnover on its own is not enough.
- Check the overrides first. Confirm group status, shareholder register and any lender or lease covenants before concluding a client is exempt.
- Talk to the client before the year end closes, not after you've drafted their accounts. A client who hears "you don't need an audit any more" from someone else first is a client who starts shopping around.
- Have a replacement service ready to offer — an assurance review, management accounts, or an advisory retainer — before the audit fee disappears, not after.
- Update engagement letters and file a note recording the size classification judgement for each affected client, including which tests were met and which overrides were checked.
