Understanding Micro-Entity Accounts in the UK

If you run a very small limited company in the UK, you've probably heard the term "micro-entity" thrown around. But what does it actually mean, and why should you care?

In this guide, we'll explain what qualifies as a micro-entity in the UK, the benefits of this classification, and what it means for your bookkeeping and reporting requirements.

What is a Micro-Entity?

A micro-entity is the smallest category of limited company recognised by UK company law. The classification was introduced to simplify accounting and reporting requirements for very small businesses.

To qualify as a micro-entity, your company must meet at least two of the following three conditions:

• Turnover: No more than £632,000 per year (increasing to £1 million for accounting periods starting on or after 6 April 2025)
• Balance sheet total: No more than £316,000 (increasing to £500,000 for accounting periods starting on or after 6 April 2025)
• Employees: No more than 10 employees on average

Benefits of Micro-Entity Status

If your company qualifies as a micro-entity, you benefit from significantly simplified accounting and reporting requirements:

Simplified Financial Statements

Micro-entities can prepare abbreviated accounts containing only a simplified balance sheet and profit and loss account. You don't need to include detailed notes to the accounts or a directors' report (though you still need a directors' approval statement).

Reduced Filing Requirements

When filing your accounts with Companies House, you only need to submit your simplified balance sheet. The profit and loss account doesn't need to be filed publicly, giving you more privacy about your company's financial performance.

Lower Accountancy Costs

Because the reporting requirements are simpler, many micro-entities find that their accountancy fees are lower. Some very small companies can even manage their own bookkeeping and only need an accountant to review and file their annual accounts.

Micro-Entities and Cash-Basis Accounting

Many micro-entities also benefit from using cash-basis accounting for their bookkeeping. This is a simpler method where you record income and expenses when money actually moves in and out of your bank account, rather than when invoices are issued or received.

Cash-basis accounting is particularly well-suited to micro-entities because:

• It's simpler to understand and maintain
• It matches how many small businesses naturally think about their finances
• It requires less complex adjustments at year-end
• It can help with cash flow management by focusing on actual money movements

However, not all micro-entities will be suitable for cash-basis accounting. Companies that hold significant stock, have long payment terms with customers, or are VAT-registered may need to use accruals accounting instead.

Do You Need to Register as a Micro-Entity?

There's no formal registration process. If your company meets the size thresholds, you can simply choose to prepare your accounts using the micro-entity regime. Your accountant can help you determine if this is the right approach for your business.

Looking Ahead

The UK government has recognised that very small businesses need simplified accounting rules, and the micro-entity regime delivers this. The recent increases to the size thresholds (effective from April 2025) mean even more small companies will be able to benefit from these simpler rules.

If you're running a micro-entity limited company, it's worth understanding these rules and making sure you're taking advantage of the simplified reporting available to you.