If you last checked whether your company counts as a micro-entity, the answer may have changed — and not because your business did.
In April 2025 the government raised the micro-entity size limits for the first time in over a decade. Turnover of £632,000 became £1 million. The balance sheet limit went from £316,000 to £500,000. Thousands of UK companies that were previously classed as “small” now qualify as micro-entities, which means shorter accounts, less disclosure, and a considerably cheaper filing job.
Here’s exactly where the thresholds sit for 2026, how the qualifying test actually works, and the traps that catch directors out.
The micro-entity thresholds for 2026
A company qualifies as a micro-entity if it meets at least two of these three conditions:
| Test | Threshold |
|---|---|
| Annual turnover | Not more than £1 million |
| Balance sheet total | Not more than £500,000 |
| Average number of employees | Not more than 10 |
These limits apply to financial years beginning on or after 6 April 2025, under the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024. The previous limits were £632,000, £316,000 and 10 employees.
Two out of three is the whole test. You do not need to meet all three. A consultancy turning over £900,000 with a £200,000 balance sheet and 14 employees still qualifies — it satisfies the turnover and balance sheet tests, and that is enough.
Balance sheet total means total assets, not net assets. This is the single most common misreading. Section 384A of the Companies Act 2006 defines it as the aggregate of the amounts shown as assets — before deducting any liabilities. A company with £600,000 of assets and £550,000 of creditors has a balance sheet total of £600,000, not £50,000.
Turnover is pro-rated for short periods. If your accounting period is nine months rather than twelve, the £1 million limit is proportionately reduced.
How the two-year rule works
Qualifying is not a year-by-year decision. Under section 384A(3), a change in status only takes effect if it happens in two consecutive financial years.
In practice:
- Your first financial year — a single-year test. Meet two of three and you qualify immediately.
- After that — if you exceed the limits in one year but drop back the next, nothing changes. You stay a micro-entity throughout.
- To lose the status — you must exceed the limits in two consecutive years. You then cease to qualify from the second of those years.
- To gain the status — the same rule in reverse. A growing company that falls back under the limits must be under them for two consecutive years before it qualifies.
There is one important easement built into the 2024 regulations. For the first financial year beginning on or after 6 April 2025, you apply the new thresholds to the prior year as well, as if they had always applied. Without this, almost no one could have used the uplift immediately. With it, a company that was above the old £632,000 limit but comfortably under the new £1 million one qualifies straight away.
Who cannot be a micro-entity
Size is not the only test. Section 384B rules out certain companies outright, regardless of how small they are.
Excluded at any point in the financial year:
- Public limited companies
- Charities — including charitable companies limited by guarantee
- Investment undertakings and financial holding undertakings
- Credit institutions and insurance undertakings
- Authorised insurance companies, banking companies, e-money issuers, MiFID investment firms and UCITS management companies
- Members of an ineligible group
Group companies are also excluded, on either side of the relationship. A parent company that prepares group accounts cannot be a micro-entity. Neither can a subsidiary whose figures are consolidated into group accounts. A parent that does not prepare group accounts can still qualify — but only if it meets the size limits on its own figures and the group as a whole qualifies as a small group.
LLPs can be micro-entities. This surprises people, and plenty of online guidance gets it wrong. Micro-entity status was extended to limited liability partnerships in 2016, and the 2024 regulations uplifted their thresholds to the same £1 million / £500,000 / 10. Qualifying partnerships are a different matter — they were expressly excluded from the micro-entity regime when it was introduced, and that has never been reversed.
Micro-entity vs small company: the practical difference
Both regimes exist, and a micro-entity is by definition also small. The size limits for a small company are now £15 million turnover, £7.5 million balance sheet total and 50 employees — so almost every micro-entity has a choice about which regime to use.
The difference is in what you prepare and what the public sees.
| Micro-entity (FRS 105) | Small company (FRS 102 1A) | |
|---|---|---|
| Accounting standard | FRS 105 | FRS 102 Section 1A |
| Balance sheet format | Prescribed short format, no breakdown of fixed assets | Fuller format with categories |
| Notes required | Four, at the foot of the balance sheet | Substantially more |
| Filed at Companies House | Balance sheet only | Balance sheet, P&L optional |
| Directors’ report | Not required | Required (though not always filed) |
| Accounting policies note | Not required | Required |
| Preparation cost | Lower | Higher |
The micro-entity regime is optional. You are entitled to use it, not obliged to. If you opt in, you must apply FRS 105 in full.
What FRS 105 will not let you do
The simplification comes with real restrictions, and for some companies they are dealbreakers.
You cannot revalue assets. FRS 105 disapplies the alternative accounting rules entirely. Everything sits at historical cost less depreciation less impairment.
Investment property is held at cost. No fair value. If you hold property that has appreciated significantly, a micro-entity balance sheet will show it at what you paid, which may not be the picture you want a lender to see.
No deferred tax. FRS 105 states plainly that a micro-entity shall not recognise deferred tax.
No fair value accounting generally, including for derivatives and financial instruments.
No capitalising borrowing costs or development costs. Both must be expensed as incurred. There is no policy choice and no internally generated intangibles.
No equity accounting for subsidiaries, associates or joint ventures.
There is also a legal point worth understanding. Section 396(2A) of the Companies Act presumes that micro-entity minimum accounting items give a true and fair view. Directors and auditors must disregard accounting standard provisions requiring additional information. That is what makes the short format legally safe — but it also means the accounts are genuinely minimal.
Where the restrictions bite: if you are raising finance, preparing to sell, or hold appreciating property, the cost-only balance sheet may work against you. In those cases, small company accounts under FRS 102 1A are often the better commercial choice even though they cost more to prepare.
What a micro-entity actually files
As things stand in 2026, a micro-entity delivers its balance sheet only to Companies House, including the four notes at the foot of it. You may choose to file the profit and loss account, but you are not required to.
That is changing. From April 2028, micro-entities will have to file a profit and loss account alongside the balance sheet, plus the auditor’s report unless exempt. Small companies will file a P&L too. Abridged accounts are being abolished. Small and micro companies will be able to opt out of publishing the P&L on the public register — Companies House, HMRC and law enforcement retain access, but competitors and credit agencies will not see it.
A directors’ report filing requirement for small companies was originally part of the package, but Companies House now expects it to fall away: the government has said it intends to remove the requirement for any company to produce a directors’ report at all. Treat that element as unsettled.
From the same date, all accounts must be filed using commercial software in iXBRL format. Companies House web filing and paper routes close for accounts, though they remain open for confirmation statements and other filings.
Note that this timetable moved. It was originally announced for April 2027 and confirmed as April 2028 on 9 June 2026. A lot of published guidance still shows the old date.
The four notes every micro-entity balance sheet needs
FRS 105 requires exactly four disclosures at the foot of the balance sheet:
- Off-balance sheet arrangements
- Average number of employees during the year
- Advances, credit and guarantees granted to directors
- Financial commitments, guarantees and contingencies
There must also be a statement immediately above the director’s signature confirming the accounts are prepared under the micro-entity provisions. Omitting that statement is a genuine compliance failure, and it is one of the more common errors in DIY filings.
Frequently asked questions
Do the thresholds apply to my current accounts?
They apply to financial years beginning on or after 6 April 2025. If your year end is 31 March, your year beginning 1 April 2025 falls just outside — the year beginning 1 April 2026 is your first under the new limits. A 31 December year end brings you in from 1 January 2026.
Does being a micro-entity change my corporation tax?
No. The size regime governs what you prepare and file at Companies House. Corporation tax is calculated the same way regardless — though FRS 105’s treatment of items like revaluations and deferred tax will change the accounting profit you start from.
Can I switch back to small company accounts?
Yes. The micro-entity regime is optional each year, subject to the two-year qualifying rule. Switching means restating comparatives, so it is not free, but it is permitted.
Does a dormant company qualify?
Almost certainly, on size. A dormant company files dormant accounts under a separate simplified process, but it still needs to file annually.
What if I get the classification wrong?
Filing micro-entity accounts when you do not qualify means your accounts do not comply with the Companies Act. Companies House may reject them, and if the deadline passes in the meantime you face an automatic late filing penalty starting at £150.
Getting it filed
The threshold test is straightforward once you know the rules. Where it gets expensive is the year you are close to a limit, or the year you are unsure whether the two-year rule has flipped your status — because getting it wrong means rejected accounts and a penalty clock that does not stop.
SmartFiling files micro-entity accounts from a fixed £299, including FRS 105 accounts, the CT600, iXBRL tagging and submission to both Companies House and HMRC. Every filing is reviewed and signed off by an ICAEW Chartered Accountant, and turnaround is seven working days from receiving your records.
