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This guide will help you get to grips with calculating UK depreciation for small businesses.

Depreciation is a term that encompasses other accounting concepts such as:

  • Fixed assets;
  • Depreciation rates and methods;
  • Business profitability.

How you have to calculate depreciation depends on the business, what has been bought, its cost and how it was purchased.

UK Depreciation and depreciation rates in business are accounting terms. 

When a business buys fixed assets it will use it for a number of years.  So that means, in accounting, there needs to be a way to expense the cost of the asset over the number of years it’s used.

These rules apply whether the fixed asset is paid for in full or on finance.

What is Depreciation?

When you buy things in your business the way you need to handle them for bookkeeping and taxes depends on what you have bought.

For example, a self-employed Amazon seller buys two things:

  1. New laptop
  2. Products to sell online

The laptop will be used for several years, but the product will be sold on. The laptop will be classified as a fixed asset.

What is Fixed Asset?

fixed asset is something a business buys, generally using it for more than one year and is fundamental to running the business.

In the example above, the Amazon seller will use the laptop for running and managing their business.

Examples of small business fixed assets include things like:

  • Laptop;
  • Printer;
  • Vehicle;
  • Premises;
  • Office furniture.

Learn more: What is a Fixed Asset and How to Calculate Its Cost

How to Calculate UK Depreciation

There are two main methods used in the UK to calculate depreciation – the straight-line method and reducing balance method.

Here are the steps you need to take to depreciate your fixed assets.

Step 1: Work out UK Depreciation Rate

The depreciation rate you need will be based on the type of asset and how long it will be used (useful life).

Some assets have a residual value, in which case the depreciation rate will be slightly different.

What is Residual Value?

Residual value is the amount an asset is worth at the end of its useful economic life.

Other assets, like Buildings, go up in value. Which means that commonly buildings are not depreciation in the UK accounting.

Useful life in accounting means to the number of years the asset will be used by the business to generate income.

Here are some examples of depreciation rates:

Depreciation Rate on a Laptop

A freelancer buys a new laptop and expects to keep it for 3 years before it needs replacing. The depreciation rate on the laptop will be calculated over 3 years.

Depreciation Rate for Furniture and Office Equipment

A business fits out a new office, buying various pieces of furniture and office equipment. The business expects that it will use the furniture for 10 years. The depreciation rate will be calculated over 10 years.

Depreciation for Land

In the UK it is considered that land will always have a value of at least the same price it was purchased for, if not go up in value.

For this reason, it is common for land not to be depreciated in UK accounting.

Step 2: Choose UK Depreciation Method

The cost of a fixed asset can be written off against profits over useful life in two different ways:

Straight-Line Method of Depreciation

The straight-line method is the simplest way to depreciate fixed assets where you write off the asset over the useful life in equal amounts. 

You calculate depreciation using the straight-line method with this formula:

Depreciation = Cost of Fixed Asset / Useful Life of Fixed Asset

Example of Calculating Straight Line Depreciation

You have purchased a computer for £1,000 and estimate you will keep it for 3 years. At the end of the 3 years, the computer will have no residual value

The computer will be depreciated at £333.33 per year for 3 years (£1,000/3 years).

If the computer has a residual value in 3 years of £200, then depreciated would be calculated on the amount of value the laptop is expected to lose.

Value of the asset (£1,000-£200)=£800
Depreciation £800/3= £266.67

Reducing Balance Method of Depreciation

The reducing balance method of depreciation is used if an asset depreciates more at the start of its life compared to the end of its life.

It is particularly applicable if you have an asset that loses significant value at the beginning of its life, such as a van or lorry.

In the first year, you calculate depreciation of the asset by a percentage.

Then in the following years, you calculate depreciation at the same percentage based on the remaining value rather than the original cost.

Example of Calculating Reducing Balance Depreciation

You have purchased a company pickup truck for £44,000 and estimate it will lose 30% of its value in the first year.

Depreciation for the first 5 years would be calculated out as follows:

Year ValueDepreciation (30%)Book Value remaining
1 £44,000.00 £13,200.00 £30,800.00
2 £30,800.00 £9,240.00 £21,560.00
3 £21,560.00 £6,468.00 £15,092.00
4 £15,092.00 £4,527.60 £10,564.40
5 £10,564.40 £3,169.32 £7,395.08

Double-Entry Bookkeeping for Depreciation

Once you have calculated depreciation, regardless of which method you choose for depreciation, the double-entry bookkeeping is the same.

This is the entry in the books:

Dr Depreciation (profit and loss account)
Cr Fixed asset depreciation (Balance sheet)

The Effect of Depreciation on Profitability

Depreciation periodically writes off a portion of the cost of a fixed asset as an administrative cost in the profit & loss account of a business.

This reduces business profit each financial year as an overhead. 

It is a reflection of the use of an asset each year as a business generates income.

Is Depreciation Allowable for Corporation Tax?

Depreciation is not allowable for corporation tax.

The reason depreciation is not an allowable expense for corporation tax is that depreciation rates and method vary business to business.

It may mean a business chooses a more aggressive depreciation rate than is appropriate, to get tax relief sooner rather than later.

Instead, for corporation tax purposes, depreciation is not allowable and is replaced by capital allowances.

Capital allowances are a fixed rate that businesses need to use to calculate how much of the cost of the asset is tax allowable each year.

Read More: HMRC Capital Allowances 2019/2020

Depreciation and Self-Assessment

Depreciation is not an allowable expense for self-assessment.

Again, HMRC allows self-employed business owners to claim capital allowances and the annual investment allowance.

But where self-employed individuals choose to use the cash basis for completing their self-assessment tax return they can claim the full cost of the asset in the year they buy it. Except for cars.

Updated 15 July 2019