Changes to Company Size Thresholds

Changes to Company Size Thresholds: What’s Happening, and How Does it Impact Off-Payroll Working?

From April 2025 amendments to the Companies Act 2006 are set to come into effect which will see an increase to company size thresholds by approximately 50%, as well as removing several reporting requirements from the Directors’ Report. 

These changes aim to simplify processes, ease reporting requirements for businesses, and adjust for inflation since the thresholds were last set in 2013. The government estimates that this will save companies more than £240m per year.

Updated company size thresholds

The updated size thresholds for micro, small, medium, and large entities are as follows:

What do the changes mean for businesses?

It is estimated that approximately 113,000 entities will shift from small to micro, around 14,000 from medium to small, and about 6,000 from large to medium. Companies able to move down a size category will be able to benefit from reduced financial reporting and auditing requirements. For example, organisations moving from medium to small will be exempt from the requirement to have a statutory audit of their annual accounts, while those moving to the micro category will no longer need to produce a Directors’ Report.

The increased thresholds apply to financial periods starting on or after 6 April 2025. However, companies can use the new thresholds for both the current and previous years in their first financial statements beginning after that date.

What do the threshold changes mean for the off-payroll working rules?

As the result of a request from ICAEW, HMRC has also confirmed that the changes to company size thresholds will also apply for the purposes of the off-payroll working rules.

Under the current off-payroll working rules, the client or end-user receiving services from a worker through an intermediary must determine the worker's employment status. If the client decides the worker is a deemed employee, they must operate PAYE and National Insurance contributions. These rules apply to businesses that are in the public sector, or private sector businesses classed as medium or large according to the criteria as set out in the Companies Act 2006. Those private sector companies classed as small do not need to consider the off payroll working rules, and any limited company contractors they engage must consider their own IR35 status as per the original Chapter 8 of the legislation.

Per the amendments to the Companies Act a private company or organisation will be considered ‘small’ if two out of the three following conditions are met:

•    Turnover of not more than £15m (increased from £10.2m);
•    Balance sheet total of not more than £7.5m (increased from £5.1m); and
•    Monthly average number of employees – 50 (no change).

The result of this is that a number of businesses which would previously have been considered ‘medium-sized’ will now be re-categorised as ‘small’. This means that the responsibility for determining IR35 status will sit with the contractor’s PSC, rather than the client, under to Chapter 8 ITEPA.

For the purposes of the off-payroll working rules, company size is determined by reference to a company’s previous financial year end and applies from the next tax year after the filling period, from which point the off-payroll rules are applicable/or not for the duration of a tax year This therefore adds an additional timing complexity, with a delay between financial periods and actually being able to apply the criteria in a specific tax year.

So, whilst the company size threshold changes will apply to the Compancies Act from 1st April 2025 we are awating guidance from HMRC as to when the impact of this will be realised to those considering the off-payroll rules.