We provide and update on the ESOS Phase 4 qualification thresholds to ensure compliance with the UK ESOS Regulations.

ESOS Phase 4 qualification thresholds

UK organisations are considered large undertakings if it meets at least one of the below on the qualification date.

The qualification date for ESOS Phase 4 is 31 December 2026.

at least 250 employees; or

an annual turnover more than £44 million AND an annual balance sheet of more than £38 million; or

is part of a corporate group which includes a UK undertaking which meets the above criteria.

To determine if you qualify you will need to review your annual accounts for the financial year ending either:

on the qualification date of 31 December 2026, or

in the 12 months immediately preceding the qualification date of 31 December 2026.

Below we explore the total number of employees and financial criteria for ESOS Phase 4 qualification.

Total number of employees

A person is employed by an undertaking if they are:

an employee

an owner / manager

a partner.

Employees are persons employed under contracts of service, regardless of contracted hours and status (full time / part time).

The number of employees means the average number of people employed by the undertaking in the year.

To determine whether you meet the employee criteria you need to work out your average number of employees in the relevant accounting period:

number of employees for each month of the financial year (whether for the whole month or part of it)

add together the monthly totals

divide by the number of months in the financial year

If you are a UK undertaking which directly (i.e. not via a foreign subsidiary) employs people who are based overseas, you must still include them in your employee count.

You usually do not have to count agency workers as employees, but you should check their contracts with a legal advisor to confirm this.

If you sub-contract work, then you should talk to HMRC to find out if the sub-contractors are considered your employees.

Example of calculating employees

The financial year for Company A runs from 1 April to 31 March the following year.

At the qualification, the most recent set of accounts for Company A are up to 31 March 2026.

This means Company A must calculate the number of employees during that period.

On 1 April Company A had 5 directors and 235 employees and on 10 July hired 20 more employees.

There were no further changes in employee or director numbers before the end of the year.

From April, May and June, Company A had a total of 240 staff (5 directors plus 235 employees).

For 9 months (July to March) the company had a total 260 staff (5 directors and 255 employees).

For ESOS purposes, the number of employees for the year for Company A is:

[(240 x 3) + (260 x 9)] / 12 = 255

Company A exceeds the employee threshold of 250 at the qualification date.

This does not mean Company A meets the ESOS Phase 4 qualification criteria, as they need to look back over previous years.

They need to determine whether the number of employees were maintained for at least two consecutive accounting periods.

If Company A had 250 employees or more for 2 x consecutive accounting periods the it qualifies for ESOS participation.

If Company A did not maintain this status for 2 consecutive accounting periods, then it does not qualify for ESOS.

Meeting the financial conditions

In summary;

“turnover”, means the amounts derived from sales of goods and services falling within the company's ordinary activities, after deduction of—

(a) trade discounts,

(b) value added tax, and

(c) any other taxes based on the amounts so derived

“balance sheet total”

means the aggregate of the amounts shown as assets in the company’s balance sheet.

that is before deducting both current and long-term liabilities and therefore it is the gross figure not the net figure.

Example of checking financial qualification

Company A does not meet the ESOS Phase 4 qualification criteria as it did not satisfy the financial thresholds for 2 consecutive accounting periods.

Conversely, if Company A satisfied the financial thresholds for 2 x consecutive accounting periods then it qualifies for ESOS participation.

Conclusion:

If your organisation is very close to the threshold for qualification or has recently grown or shrunk, then you may need to look back over several accounting periods to establish if you qualify.

This is because the status of an organisation is determined by whether they have maintained their size for at least two consecutive accounting periods.

The exact wording from the ESOS Regulations is as follows:

Where, in any accounting period, an undertaking is a large undertaking (or a small or medium undertaking, as the case may be), it retains that status until it falls within the definition of a small or medium undertaking (or a large undertaking, as the case may be) for two consecutive accounting periods.

Please visit our ESOS compliance page for more information.