What is an SME?

Small and medium-sized enterprises (SMEs) are the backbone of the UK economy, and figuring out whether your business falls into the SME category isn’t always straightforward. To correctly define SMEs means to understand the classifications of business structures, which will help you apply for the right type of funding and support, ensure you follow the right tax and legal obligations and can put effective and tailored strategic plans into place.

In this guide, we’ll cover the following:

• What is an SME in business?
• What is classed as an SME?
• What is an SME example?
• The role of SMEs in the UK
• Eligibility and support for SMEs
• Advantages and disadvantages of being an SME
• How to register as an SME
• How Dojo can help
• FAQs

The definition: What is an SME business?

An SME, or Small and Medium-sized Enterprise, is a business with fewer than 250 employees and either an annual turnover of under £44 million or a balance sheet total below £38 million. 

The UK generally follows the EU’s definition, which also splits SMEs into micro, small, and medium-sized categories based on size. 

What is classed as an SME?

So what is an SME business in terms of the qualifying criteria? To be classed as an SME in the UK, a business needs to stay under certain limits for staff numbers, annual turnover, and/or balance sheet total.

Staff numbers are worked out using annual work units (AWUs) – with one AWU representing one full-time employee for a full year. Part-time or seasonal workers count as a proportion of that. Financially, a business needs to meet the staff limit and either the turnover or the balance sheet total – whichever fits best with how the business is set up.

So what is an SME in the UK and how is it calculated? Here’s how the categories are broken down:

What is an SME example?

To define small and medium enterprises, let’s take a look at some practical examples.

Take a local bakery with 15 employees and an annual turnover of £1.5 million – it sits comfortably within the small enterprise bracket under the EU criteria. It has fewer than 50 staff and stays below the £8.8 million turnover threshold.

Alternatively, a software company with 100 employees and £30 million in annual turnover. It’s well under the 250 staff limit and the £44 million turnover cap, so it would be classed as a medium-sized enterprise.

The role of SMEs in the UK

SMEs play a massive role in the UK’s business world, making up 99.9% of all businesses — that’s about 5.5 million enterprises as of early 2021¹. They employ around 16.3 million people, which works out to 61% of the UK workforce, and are widely seen as key drivers of innovation thanks to their agility and adaptability. 

When it comes to defining an SME, the UK largely sticks to the EU’s classification², though some government departments may tweak the thresholds slightly depending on the context or programme.

Eligibility and support for SMEs

If your business meets the SME criteria, you could be eligible for a range of government support schemes. Some programmes may have extra requirements based on your sector, location, how long you’ve been operating, or even financial indicators like gross profit –  so it’s worth checking the details before applying.

Support available to eligible SMEs includes:

• R&D tax credits: Aimed at encouraging innovation by helping businesses recover some of the costs involved in research and development.
• Grant funding: Available through organisations like Innovate UK, which supports projects with real commercial potential.
• Investment schemes: Such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which offer tax relief to investors backing early-stage or high-growth businesses.
• Business advice and funding support: Provided through local Growth Hubs and the British Business Bank, which help businesses access loans, mentoring, and other essential resources.

Advantages and disadvantages of being an SME

Advantages

• Flexible and responsive: Smaller teams and flatter structures mean decisions can be made quickly, helping SMEs pivot faster in response to new trends or challenges.
• Better customer service: With fewer layers between the business and its customers, SMEs can offer more personalised support and build strong, loyal relationships.
• Great at serving niche markets: SMEs can meet specialist or local needs that may not be profitable or scalable enough for larger competitors.
• Big local impact: Many SMEs hire locally, support other small businesses, and have a visible presence in their communities – making them important to regional economies.
• Quick to innovate: Without the red tape of big corporations, SMEs can test new tools, platforms, or ideas much faster.

Disadvantages

• Harder to secure funding: SMEs can struggle to get loans or attract investment, especially early on, which can limit growth or put pressure on cash flow.
• More exposed to economic shocks: With tighter margins and fewer reserves, economic downturns can hit SMEs harder than larger firms.
• Tougher to attract top talent: Competing on salary, perks, and career progression can be a challenge – especially against big-name employers.
• Weaker supplier power: SMEs often pay more for goods and services because they can’t negotiate bulk discounts or long-term contracts.
• Admin can be a burden: With smaller teams, compliance and regulatory tasks can take up a disproportionate amount of time and resources.

How to register as an SME

• Choose your business structure: Decide whether you’ll operate as a sole trader, partnership, or limited company – this affects your taxes, legal responsibilities, and personal liability.
• Register with Companies House: If you’re setting up a limited company, you’ll need to register it with Companies House. This includes picking a unique name, submitting documents like a memorandum of association, and paying a small fee.
• Register with HMRC: All businesses must register with HMRC for tax. You’ll also need to register for VAT if your turnover exceeds the threshold, and setf up PAYE if you plan to hire staff.
• Check for licences and permits: Depending on your industry, you may need specific licences to operate legally. Make sure you understand what applies to your sector.
• Set up business banking and accounting: Open a business bank account and choose an accounting system to manage income, expenses, and cash flow – it’ll save you stress come tax time.

Sources

¹ https://www.gov.uk/government/statistics/business-population-estimates-2021 

² https://ec.europa.eu/growth/smes/sme-definition_en