If you've been asked whether your business is an SME, you probably want a straight answer and a way to check. The label isn't just jargon. It decides how you file your accounts, whether you need an audit, and how much financial detail you have to publish.
This guide explains what an SME is, sets out the company size thresholds that changed from 6 April 2025, and walks you through working out exactly where your business sits. It's written for UK business owners, from sole traders up to growing limited companies.
We'll keep the figures dated and sourced, so you can act on them with confidence.
What does SME stand for?
SME stands for small or medium-sized enterprise. It's the standard term for businesses that sit below the threshold for large companies.
In the UK, three measures decide a company's size: the number of employees, annual turnover, and balance sheet total. Government bodies, lenders, and grant schemes all use these size categories when they set eligibility rules and reporting requirements.
You'll sometimes hear "SME" used loosely to mean "small business". Strictly, it covers small and medium-sized businesses, and in accounting terms it also takes in the smallest category, micro-entities.
How is an SME defined in the UK?
For accounting and filing purposes, company size in the UK comes from the Companies Act 2006. That matters because your size category sets your reporting obligations at Companies House, including how much detail you publish and whether you need a statutory audit.
A company's size is decided by a "two out of three" rule. You compare your turnover, balance sheet total, and average employee number against the limits for a category. If you meet at least two of the three limits, you fall into that category.
Note that company size rules apply to companies (and LLPs). Sole traders and ordinary partnerships don't file accounts at Companies House, but they're still counted as part of the SME population in government statistics.
These rules cover England, Wales, Scotland, and Northern Ireland equally. Company law is UK-wide, even though some taxes differ between the nations.
What are the company size thresholds for 2025?
The financial thresholds were uplifted for financial years beginning on or after 6 April 2025. Employee limits stayed the same. A company must meet at least two of the three conditions in a row to qualify for that category.
| Category | Turnover (not more than) | Balance sheet total (not more than) | Employees (not more than) |
|---|---|---|---|
| Micro-entity | £1 million | £500,000 | 10 |
| Small | £15 million | £7.5 million | 50 |
| Medium-sized | £54 million | £27 million | 250 |
| Large | Above the medium limits | Above the medium limits | More than 250 |
A business that exceeds the medium-sized limits is classed as large. "SME" covers everything up to and including the medium-sized category, so up to 250 employees.
The balance sheet total means the sum of your assets before deducting liabilities, as shown in your accounts.
How do you work out your company's size?
Run your latest figures through the two-out-of-three test. The flexibility means one unusual line won't automatically move you up a category.
Step 1. Work out your average number of employees across the financial year.
Step 2. Take your annual turnover from your latest accounts.
Step 3. Find your balance sheet total (the total of your assets).
Step 4. Compare all three against the limits in the table above.
Step 5. If you meet at least two of the limits for a category, that's your size for filing purposes.
There's one more rule worth knowing. To change category, you usually need to meet (or stop meeting) the conditions for two consecutive years. That stops a single odd year tipping you back and forth.
Illustrative example: a manufacturer near the small-company line
Imagine a manufacturing company with these figures for its financial year:
- 40 employees
- £12 million turnover
- £6 million balance sheet total
Against the thresholds for financial years beginning on or after 6 April 2025:
- Employees: 40, under the 50 limit. Met.
- Turnover: £12 million, under the £15 million limit. Met.
- Balance sheet: £6 million, under the £7.5 million limit. Met.
All three are met, comfortably more than the two required, so the company is small. Under the old limits (turnover £10.2 million, balance sheet £5.1 million), the same company would have met only the employee test and would have been medium-sized.
Being small can mean it qualifies for audit exemption and can file simpler accounts. This is an illustrative example to show the method, not a real client.
What changed on 6 April 2025?
For financial years beginning on or after 6 April 2025, the turnover and balance sheet thresholds were raised across all categories. Employee limits didn't change. The aim was to account for inflation since the limits were last set and to ease the reporting burden on smaller companies.
| Category | Turnover: old to new | Balance sheet: old to new |
|---|---|---|
| Micro-entity | £632,000 to £1 million | £316,000 to £500,000 |
| Small | £10.2 million to £15 million | £5.1 million to £7.5 million |
| Medium-sized | £36 million to £54 million | £18 million to £27 million |
The government estimated the change would benefit around 132,000 companies. Roughly 113,000 small companies move to micro-entity status, about 14,000 medium-sized companies become small, and around 5,000 large companies become medium-sized.
In practice, moving down a category can mean less to file. A company that becomes small may qualify for audit exemption, and a company that becomes a micro-entity can prepare and file simpler accounts. Whether you actually save on an audit depends on your circumstances, including whether your articles or shareholders still require one.
If you're not sure how the new thresholds affect your next set of accounts, our statutory accounts service can run the numbers and confirm your filing position.
Why does your SME status matter?
Your size category isn't an academic label. It drives real obligations and choices.
Filing and audit
Your category sets what you file at Companies House and how much you disclose. Small companies and micro-entities can file simpler accounts. A small company can also claim audit exemption if it meets at least two of three conditions: turnover of no more than £15 million, a balance sheet total of no more than £7.5 million, and no more than 50 employees. An audit may still be needed if your articles require one or shareholders holding 10% or more ask for one.
Tax and reliefs
Company size can affect access to certain tax reliefs and the rules that apply to you. For example, the rate of Corporation Tax depends on your profits, with a small profits rate of 19% for profits up to £50,000 and a main rate of 25% for profits above £250,000 for the financial years starting in 2025 and 2026, with marginal relief in between. Getting your accounts right feeds straight into your Corporation Tax return.
Planning and funding
Lenders, grant schemes, and suppliers often set terms by business size. Knowing your category helps you target the right opportunities and avoid wasting time on applications you won't qualify for.
If you'd like a clear read on where your business sits and what it means for your accounts and tax, book a free call with a Zmartly accountant. We work with limited companies, small businesses, and sole traders across the UK.
How important are SMEs to the UK economy?
SMEs make up the overwhelming majority of UK businesses. At the start of 2024, there were around 5.5 million private sector businesses in the UK, and SMEs accounted for 99.8% of them, according to the government's Business Population Estimates.
The numbers behind that headline are striking:
- Around 5.45 million were small businesses with 0 to 49 employees, about 99.2% of all businesses.
- Around 37,800 were medium-sized, with 50 to 249 employees, about 0.7%.
- Around 8,250 were large businesses with 250 or more employees, about 0.2%.
SMEs accounted for an estimated 16.6 million jobs, about 60% of private sector employment, and roughly £2.8 trillion of turnover, about 52% of the private sector total. In short, small and medium-sized businesses do a large share of the country's economic work.
Frequently asked questions
How many employees can an SME have?
Up to 250. A business with more than 250 employees is generally classed as large, although the official test also looks at turnover and balance sheet total on a two-out-of-three basis.
Can a sole trader be an SME?
Yes. A sole trader counts within the SME population, at the micro end. Company size rules under the Companies Act apply to companies and LLPs that file at Companies House, but sole traders are still SMEs for statistical and general purposes.
What's the difference between an SME and a startup?
A startup is a new business, usually focused on fast growth. SME is a size classification based on employees, turnover, and balance sheet total, regardless of age. A startup can be an SME, but many SMEs are long-established businesses.
Does the SME definition only apply to limited companies?
No. The general SME concept applies to all structures, including sole traders, partnerships, LLPs, and limited companies. The statutory size thresholds in the Companies Act are what govern company and LLP filing specifically.
What does SME mean when it describes a person?
In project and consulting contexts, SME can stand for Subject Matter Expert, meaning an individual with deep specialist knowledge. It's a different use of the same letters. The context usually makes clear whether someone means a small business or an expert.
How often should I check my company's size category?
Review it each year when you prepare your accounts. Remember the two-consecutive-years rule: a one-off change in turnover, assets, or staff numbers usually won't move you between categories on its own.
