What is an SME? Small business status explained

What counts as an SME in the UK?

In the UK, SME is a broad term that’s used in lots of everyday business situations, from government support and funding, to insurance, finance, and supplier forms.

Most commonly, SMEs are grouped like this:

Source: gov.uk/government/publications/fcdo-small-to-medium-sized-enterprise-sme-action-plan

These categories are widely referenced by UK Government departments and regulators, even though the thresholds are shown in euros, the figures are equivalent in GBP(£s).

If you’re a sole trader, freelancer, or small service-based business, you’ll almost always fall into the micro business category.

It’s also worth knowing that not every organisation uses exactly the same definition. So, if you’re filling in a form or applying for something specific (like insurance, finance, or a grant), it’s always best to follow the definition they provide.

SME size vs business structure

It’s very common for small business owners to wonder whether SME status depends on how their business is set up.

Put simply:

• Business structure is about how your business is legally organised

(for example, sole trader, partnership, or limited company)

• SME status is about the size of your business

They’re connected – but they’re not the same thing.

For example:

• A one-person limited company is usually classed as a micro-SME
• A partnership with a handful of staff is still an SME
• A freelancer or self-employed person with no employees is typically considered a micro business and SME

So, if you run an independent business; whether that’s pet care, hairdressing, catering, creative services, or another specialist trade, it’s very likely you already fall under the SME umbrella.

What is the SME business landscape in the UK?

SMEs play a vital role in the UK economy and make up the vast majority of businesses operating today. While large companies often get the most attention, it’s small and independent businesses that keep many local communities and specialist services running.

In fact, there are around 5.7 million private sector businesses in the UK, and, as mentioned, over 99% of them are classed as SMEs. Together, these businesses employ around 60% of the private sector workforce, and around three-quarters operate with no employees at all beyond the owner. This reflects how common sole traders, freelancers, and very small teams are across the country.

For many independent business owners, this can be reassuring. Running a small business, even on your own, isn’t the exception in the UK economy, it’s more common than you might think.

Common SME sectors

SMEs operate across every industry, but they are especially common in sectors built around skills, services, and personal expertise. These include construction, professional services (such as consultants, IT specialists, marketers, designers, and legal professionals), wholesale and retail, and a wide range of trades, creative industries, and digital services.

This also covers many niche, service-based businesses:

• Pet care and pet grooming
• Hair and beauty
• Catering
• Photography
• Other creative or hands-on professions.

These types of businesses are often independently run, locally focused, and built around specialist knowledge or personal service.

If you run a small business in the UK, there’s a very strong chance you’re already part of this SME majority, alongside millions of other independent businesses doing similar things in their own communities and sectors.

When does SME status actually matter?

SME status isn’t something most small business owners think about every day, and that’s completely normal. For many sole traders, freelancers, and small service-based businesses, it only really comes up at certain moments.

Below are some of the main situations where SME status is commonly used.

1. Business registration and reporting

For limited companies, the size of your business can influence how certain administrative and reporting requirements work.

This can include:

• Financial reporting requirements
• Whether an audit is required
• How accounts are prepared and filed

These rules are designed to reflect the scale of a business, so smaller companies often have simpler requirements. As a business grows, these obligations can change, which is why SME size is sometimes reviewed over time.

2. Tax, finance, and funding

SME status is also commonly referenced when businesses apply for finance or support. You may see it used when:

• Applying for business loans or finance
• Accessing government-backed schemes
• Assessing eligibility for grants, support, or incentives

Different lenders and organisations may apply slightly different thresholds, depending on what they’re offering. This is why it’s important to answer questions accurately and follow the definition provided in each specific situation.

3. Insurance and risk assessment

This is one of the most practical and relevant times SME status comes into play for independent businesses.

When arranging business insurance, insurers will usually ask about:

• Number of employees
• Turnover
• Business activities
• Legal structure

These details help insurers understand how your business operates day to day. Based on this information, they can determine:

• What type of cover is appropriate
• How your level of risk is assessed
• Whether a policy is suitable and valid for your business

Being clear and accurate about your business size and setup helps make sure you’re properly protected, without paying for cover you don’t need or risking gaps in protection.

4. Working with clients and suppliers

In some cases, businesses are asked to confirm their SME status when working with clients or suppliers.

This is especially common when dealing with larger organisations or public sector bodies, where SME classification may be part of:

• Supplier onboarding checks
• Risk and compliance processes
• Their own internal or regulatory reporting

For most small businesses, this is simply a classification exercise rather than a judgement and being prepared can make the process quicker and easier.

How SME’s are offered support

Running a small business, especially on your own or with a small team, can sometimes feel like you’re expected to figure everything out as you go. The good news is that there’s a wide range of support available to SMEs, much of it designed specifically with independent and smaller businesses in mind.

For many business owners, a helpful starting point is guidance from the UK Government, which brings together information on funding, employment, tax, and day-to-day responsibilities in one place. From there, you can explore more tailored support depending on what stage your business is at.

Common types of SME support include:

Local and regional business hubs

Offering practical advice, training, and signposting to support in your area.

Chambers of Commerce and business networks

Providing networking opportunities, business guidance, and local insight.

Support organisations for small businesses

Such as membership bodies focused on the needs of sole traders and small companies, such as the Federation of Small Businesses.

Setting up an SME

For those who are just starting out, there is guidance available to help with the practical steps of setting up a business. This includes registering your business, understanding your tax responsibilities, and keeping basic financial records from the outset.

Support is also available when it comes to finance and loans. This can include business loans and government-backed finance schemes that are often aimed at SMEs, helping independent businesses access funding when they need it.

As your business develops, you may also reach a point where you’re ready to employ people. There is support available to help you understand employer responsibilities, including payroll, workplace pensions, and other obligations that come with taking on staff.

Overall, SME support in the UK reflects the fact that most businesses are small, independent, and service-based. Whether you’re just starting out or gradually growing, there are resources available to help you navigate each stage with more confidence and clarity.

Why SME status matters for insurance

Business insurance is usually built around a few core details, including the size of your business, the activities you carry out, and your level of risk exposure. Whether you work on your own or employ others also makes a difference. These factors help insurers understand what type of cover is appropriate and ensure your policy is set up correctly.

For many small businesses, this includes cover such as public liability insurance, which can help protect you if a third party is injured or their property is damaged, and employers’ liability insurance, which is a legal requirement if you employ staff.

As your business evolves; for example, if your turnover changes, you take on help, or your services expand your insurance needs can change too. Reviewing your cover from time to time can help make sure it still reflects how your business operates today.

*Disclaimer – This blog has been created as general information and should not be taken as advice. Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.