How the 2025 audit threshold rise changes your firm’s capacity plan
The regulation changed on one date. Your clients feel it on a different one, staggered by year end — and so does the gap it leaves in your audit team’s diary.
From 6 April 2025, UK audit exemption thresholds rose under SI 2024/1303 to turnover under £15m (was £10.2m) and balance sheet total under £7.5m (was £5.1m), with the 50-employee limit unchanged and a company needing to meet two of the three. The date that actually matters for each client is the start of their financial year, not the calendar year — a December year-end client is affected from the year to 31 December 2026, while a March year-end client isn’t affected until the year to 31 March 2027. For a practice, that is a forecastable slice of audit fee income converting to other work on a known schedule — a capacity-planning problem to get ahead of now, not a technical one to handle client by client as it lands.
What changed, and the date that actually matters for each client
The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 — SI 2024/1303 — raised the monetary thresholds that decide whether a company counts as micro, small, medium or large. Because audit exemption is tied to the small-company test, the exemption limits moved with it. The new limits apply to financial years beginning on or after 6 April 2025.
| Condition | Old limit | New limit |
|---|---|---|
| Turnover | £10.2m | £15m |
| Balance sheet total | £5.1m | £7.5m |
| Average employees | 50 | 50 (unchanged) |
A company qualifies as small — and, subject to the usual exclusions for public companies, financial-services firms and members of an ineligible group, qualifies for audit exemption — if it meets at least two of those three conditions. The employee limit didn’t move; the two money limits both went up by roughly 50%.
The trap is assuming every client feels this on the same date. They don’t. The regulation bites by the start of a financial year, not by calendar year 2025 or 2026, and the gap between a client’s year end and when they actually benefit can run to a full extra year:
| Client year end | First year under the new thresholds |
|---|---|
| 31 December | Year beginning 1 January 2026, ending 31 December 2026 |
| 30 June | Year beginning 1 July 2025, ending 30 June 2026 |
| 31 March | Year beginning 1 April 2026, ending 31 March 2027 — not the year ending 31 March 2026, which began 1 April 2025, five days too early |
That March row is the one that catches firms out, because it is the most common year end in UK practice and the instinctive assumption — “it’s in force from April 2025, so this year’s accounts are covered” — is wrong by a full year. There is a genuine easement running the other way, though: the transitional provision in SI 2024/1303 lets a company apply the new thresholds to its current year without first having to show two consecutive years under the new limits, which is the test that normally applies when a company’s size changes. A client whose turnover and balance sheet already sit inside the new limits can typically claim exemption in their first qualifying year, not their second.
Work out how many of your audit clients actually move
This is a one-afternoon exercise, and it is worth doing before a client asks rather than after. Pull the audit client list and sort by turnover and balance sheet total against both sets of limits.
Take an illustrative 40-client audit book. Most clients sit well clear of the old limits in one direction or the other — comfortably micro or small already, or large enough that £15m changes nothing. The clients worth a second look are the ones sitting in the band the old thresholds put outside small but the new ones put inside: turnover between £10.2m and £15m, or balance sheet total between £5.1m and £7.5m.
| Band | Illustrative count (of 40) | Likely outcome |
|---|---|---|
| Comfortably outside the new limits either way | 31 | No change |
| In the new band on turnover, balance sheet, or both | 6 | Candidates — check employees and group status |
| In the new band but blocked (group member, FCA-regulated, public company, or audit required by other legislation) | 2 | No change despite the numbers |
| Net newly eligible | — | 4 of 40, roughly one in ten |
Four out of forty is illustrative, not a sector figure — your own split depends on your client mix, and a practice weighted toward owner-managed businesses with turnover between £8m and £15m will see a higher proportion than one weighted toward small retail and hospitality. The point of running the numbers now is that each of those four has a specific year end, which means a specific quarter in which the audit fee stops, not a vague future risk. Tracking fee income by service line makes that visible well before it shows up as an unexplained gap in the management accounts.
The capacity problem this creates
Losing an audit client to exemption is not simply a fee reduction. It is a change in the shape of work two levels down: the senior who planned and reviewed that file, the manager who ran the fieldwork, the junior who did the testing. None of them disappear when the audit does — they still need a full week of chargeable work, and the firm still carries a wage bill that doesn’t shrink in proportion to the fee.
Three things tend to happen to that freed capacity, and only one of them is good:
- It sits idle. The team keeps the same rota and utilisation quietly drops, which shows up months later as a margin problem nobody can quite trace to a cause.
- It gets absorbed into compliance at the old rate card. The client still needs accounts and a corporation tax return, and the firm charges roughly what it always charged for the non-audit element — usually a fraction of the audit fee, so the gap stays a gap.
- It gets redeployed into advisory, priced properly. The client relationship, the detailed knowledge of the business, and a senior team with spare capacity are exactly the ingredients a good advisory offer needs. Pricing that work properly — value or fixed fee rather than a discounted hourly rate — is what makes the third option the one worth planning for, rather than the one that happens to a lucky few clients by accident.
Which of the three happens is almost entirely a planning question, not a client-relationship question. A firm that knows in January which four clients lose their audit requirement over the next eighteen months can brief the team, redesign the service for those accounts, and have an advisory conversation booked before the exemption even takes effect. A firm that finds out when the client’s own accountant mentions it in passing is choosing the first or second option by default.
What to do this week
- Pull the full audit client list and flag anyone within £3m of the new £15m turnover limit or £1.5m of the new £7.5m balance sheet limit — the realistic candidates over the next two to three years as well as this one.
- For each flagged client, note their financial year start date and work out the actual first year the new limits apply, using the table above rather than assuming “sometime in 2026.”
- Check group status and sector exclusions before telling anyone they’re exempt — a member of an ineligible group or an FCA-regulated client doesn’t get the exemption regardless of the numbers.
- Diary the advisory conversation for each flagged client at least two quarters before their exemption takes effect, not after their last audit sign-off.
- Put the freed capacity into a named plan — whose diary it fills, and at what rate — rather than leaving it to be absorbed informally into whatever is busiest that month.
None of this is complicated once it’s written down; the difficulty is that it competes with filing deadlines for attention and nobody owns it as a standing task. That is the gap a quarterly operating review is built to catch, and it is the kind of forward capacity planning Optivo’s Monthly COO runs as a matter of routine rather than a one-off reaction to a regulation change. If the role is new to you, what a fractional COO is sets out what that ongoing ownership actually looks like.
Common questions
Do our clients need two consecutive years under the new thresholds before they can claim audit exemption?
Not under this change specifically. The normal rule in the Companies Act requires a company to meet the small-company conditions for two consecutive financial years before a change in size status takes effect, which exists to stop a business flipping in and out of exemption on a single good or bad year. SI 2024/1303 carries its own transitional provision, though, which lets a company apply the new, higher thresholds to its current financial year without having already met them the year before. In practice that means a client whose turnover and balance sheet already sit inside the new £15m and £7.5m limits can usually claim exemption from their first qualifying year, not their second — provided none of the other exclusions, such as group membership, apply.
Which of our clients feel this first — and which not until 2027?
It depends entirely on the client’s financial year start date, not the calendar year. A client with a 31 December year end is affected from the year beginning 1 January 2026, so their 2026 accounts are the first under the new limits. A client with a 30 June year end is affected earlier still — from the year beginning 1 July 2025. The counter-intuitive one is the common 31 March year end: a client’s year ending 31 March 2026 began on 1 April 2025, five days before the 6 April 2025 cutoff, so it is still assessed on the old £10.2m and £5.1m limits. Their first year under the new thresholds doesn’t start until 1 April 2026, ending 31 March 2027 — a full year later than many firms assume.
What should we do with the audit capacity that frees up?
Treat it as a planning problem, not a reaction. The senior, manager and junior who worked that file still need a full week of chargeable work, and the wage bill doesn’t shrink just because the audit fee has gone. The weak default is letting that capacity sit at lower utilisation, or absorbing the client into compliance work priced at the old discounted rate. The better use is redeploying it into advisory for the same client, built on the detailed knowledge the audit relationship already gave the team, and priced properly rather than at a residual hourly rate. That only works if it’s planned before the exemption takes effect — ideally with the advisory conversation booked at least two quarters ahead of the client’s first exempt year, not after the last audit sign-off.
Does the audit exemption apply automatically, or does the client have to do anything?
It is not automatic. A company that meets the small-company test still has to actively claim the exemption: the directors must state on the balance sheet that the company is entitled to exemption under the relevant section of the Companies Act 2006, that no notice has been received from members requiring an audit under section 476, and that the directors acknowledge their responsibility for keeping accounting records and preparing accounts that comply with the Act. Clients sometimes assume that falling under the new thresholds simply switches audit off; it only does once that statement is made and the accounts are prepared on that basis, which is a conversation your firm needs to have with each eligible client rather than something that happens by itself.
Are the micro-entity and medium-company thresholds changing too, or just the small-company limit that drives audit exemption?
All three moved together under the same regulations, because they are set as a single scale. The micro-entity limits rose from £632,000 to £1m turnover and £316,000 to £500,000 balance sheet total, with the 10-employee limit unchanged. For most accountancy practices the small-company change is the one that matters operationally, because it is what drives audit exemption and the level of disclosure in the accounts you prepare for a much larger share of your client base. The micro move mainly affects how much a client has to disclose, not whether they are audited, since few micro-sized companies were ever subject to a statutory audit requirement in the first place.
Where does your firm actually stand?
Score it across the ten things a COO would look at first. Three minutes, an honest read on where you’re strong and where you’re exposed, and a 90-day plan for the areas holding you back.
Or book a confidential call if you’d rather just talk it through.