Understanding the 2-year rule for audit thresholds

Whether or not a business needs a statutory audit depends on a number of criteria. You can find fuller details in our post about which companies are required to be audited. That said, we often get asked about the 2-year rule for audit thresholds and exemptions. So, in this post, we take a closer look at how the 2-year rule works.

What are the UK audit thresholds?

Most businesses are required to have a statutory audit when they meet two or more of the following criteria.

• An annual turnover of more than £10.2 million (£15 million from April 2025)
• Assets in excess of £5.1 million (£7.5 million from April 2025)
• An average of 50+ employees

What is the audit 2-year rule?

The 2-year rule for audit is quite simple. If a company meets two or more of the above criteria for two years in a row, then it must have a statutory audit. Conversely, a firm that currently has to be audited can’t qualify for an audit exemption until it fails to meet at least two over the criteria over two years.

The idea behind the 2-year rule is to provide companies with stability. For example, a firm may temporarily meet the thresholds for audit. Then the following year it could be back below the thresholds. The 2-year audit rule means they don’t have to worry about the hassle and expense of a statutory audit for a single year.

When does the rule not apply?

The 2-year rule for audit doesn’t apply to certain types of company. These include firms with articles of association that require an annual audit. They also include companies in certain sectors that must be audited, regardless of size. Examples are firms in the insurance, banking or public sectors. You can learn more about these in our article about which companies need to be audited.

Practical application of the 2-year rule

Let’s look at an example to see how the 2-year rule for audit works in practice.

Imagine a company called Widgets Limited. It has the following financial record.

• Year 1. Annual turnover of £9 million, total assets of £6 million and an average of 45 employees.
• Year 2. Annual turnover of £11 million, total assets of £7 million and an average of 49 employees
• Year 3. Annual turnover of £10 million, total assets of £8 million and an average of 53 employees.

As you can see, the company meets only one of the audit threshold criteria in Year 1 (assets). As a result, it does not need a statutory audit.

In Year 2, the company meets two of the three criteria (turnover and assets). It still doesn’t need auditing because it has only met two of the criteria for a single year.

However, in Year 3 the company meets two criteria (this time assets and employee numbers). Because it has met two criteria for two consecutive year, it must have a mandatory statutory audit.

What the 2-year rule means for your business

The 2-year rule doesn’t just give businesses a degree of certainty about whether they need an audit. It also helps firms that are near the audit thresholds to plan ahead.

For example, if your company is consistently getting close to two of the audit criteria each year, it pays to monitor whether you’re likely to meet the thresholds. If you do meet them in one financial year, then you can then plan for the likelihood of needing an audit after the following year.

Can THP help?

If your business uses THP for accountancy services, we can work with you to monitor your audit status. If it looks likely that you’ll need a statutory audit, then we can put our audit services in place in good time. We’ve been auditing medium-sized companies since the 1980s, so we can help make sure your audits are valuable, useful and keep you compliant.