The requirement to disclose the average number of employees in a company’s financial statements is contained in section 411 of the Companies Act 2006. It is also included in paragraph 6.2(b) of FRS 105 The Financial Reporting Standard applicable to the Micro-Entities Regime (March 2018). You must include the average number of employees disclosure in the accounts for filing at Companies House and this information cannot be filleted out of the accounts for filing. 

It is section 382(6) of the Companies Act 2006 that describes how to calculate the average number of employees:  

  1. For each month of the financial period, find the number of persons employed under a contract of service by the company in that month. Employment doesn’t need to have been for the whole month and you should include an individual even if they were only employed for a day that month – as long as their employment was covered by a contract of service with the company. 

  2. Add together the monthly totals.

  3. Divide the total of all the months added together by the number of months covered by the company’s financial statements. 


Who should I count as an employee?  


Section 382(6)(a) of the Companies Act 2006 states that all ‘persons employed under contracts of service by the company’ should be included. It does not go on to define ‘contract of service’, but it can be assumed that this is not restricted to written contracts and verbal agreements can also be considered to be a contract of service.  


When calculating each month’s total you should include: 

  • All direct employees, whether full-time or part-time.

  • Directors with a contract of service.


Note that part-time employees are counted fully in the total. For example, Employee A is contracted to work 40 hours a week and Employee B is contracted to work 20 hours a week. They both count equally as an employee in the monthly total of employees (i.e. you should not count Employee B as half an employee!)  


You should not count any person that does not have a contract of service or whose contract of service is with another company. Therefore, you should exclude: 

  • Non-executive directors if they do not have a contract of service. 

  • Casual workers and sub-contractors. 

  • Employees whose contract of service is with another group company (i.e. ‘seconded’ employees). 


Should I count furloughed employees?

In response to the recent Covid-19 pandemic the UK government launched the Coronavirus Job Retention Scheme. When it was running, it allowed eligible employers to make a claim to cover the wage costs of employees who were placed on furlough due to the impact of Covid-19. To qualify for financial support eligible employees had to be employed under a contract of service. This means that even if employees were fully furloughed and were not providing any services to their employers, they should still be included when calculating the average number of employees disclosure.