Below are the steps to adjust the size limit for an image attached to a signature or an identity.
Login to your server and edit the following file with your favorite text editor.
And look for the line containing the following information
// Maximum size of uploaded image in kilobytes
// Images (in html signatures) are stored in database as data URIs
$config['identity_image_size'] = 64;
This is around line 567.
Increasing this value will allow for larger image sizes to be attached to identities and signatures.