How to Calculate UK Depreciation and Depreciation Rates

Understand how to calculate UK depreciation, depreciation rates (straight-line and reducing balance methods) and the double-entry bookkeeping entries used in accounting.

Updated 29 December 2021

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. What is Depreciation?

Fixed assets, over time, begin to lose value* and this decrease in value needs to be reflected in the accounts using depreciation. Depreciation is the write off of fixed assets over a set period of time to reflect the use and eventual depletion in the value of the asset.

* special rules apply to land and property

Depreciation Definition

2. Types of Depreciation Methods

There are two main methods used in the UK to calculate depreciation:

  1. Straight-line method
  2. Reducing balance method

2.1 Straight Line Method

The straight-line method is the simplest way to depreciate fixed assets. Using the formula below, assets are written off in equal amounts over their useful life

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

2.1 Reducing Balance Method

The reducing balance method of depreciation is used when a fixed asset loses more value at the start of its life compared to the end of its life. Examples of these types of assets include a van or lorry.

In the first year, depreciation is calculated as a percentage of the asset cost. Then in the subsequent years, depreciation is calculated at the same percentage based on the remaining value from the previous year rather than the original cost.

3. How to Calculate UK Depreciation

Here are the steps to take to calculate depreciation:

  1. Choose Asset Type

    Fixed assets are generally grouped by asset type in accounting. So all computer equipment are grouped together for example and depreciated using the same rates.

  2. Determine Useful Life

    The useful life of a fixed asset is the number of years it is used by a business to generate income and determines the length of time an asset is depreciated over.

  3. Determine Residual Value

    Residual value is the estimated value of a fixed asset at the end of its useful economic life. Say, for example, a business purchases equipment for £10,000 which it estimates will be in use for 10 years at which point the scrap value will be £4,000 – the residual value in accounting will be £4,000.

  4. Choose Depreciation Method

    The main depreciation methods businesses commonly use are the straight line and reducing balance method, depending on what is most suitable for the asset.

4. How to Calculate Depreciation Using the Straight Line Method

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 depreciation 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

5. How to Calculate Depreciation Using the Reducing Balance Method

You have purchased a company pickup truck for £44,000 and estimate it will lose 30% of its value in the first year. Depreciation using the reducing balance method 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
Reducing Balance Method of Depreciation

6. Double-Entry Bookkeeping for Depreciation

The double-entry for depreciation in accounting is:

  • Dr Depreciation (profit and loss account)
  • Cr Fixed asset accumulated depreciation (balance sheet)

Depreciation writes off a portion of the cost of a fixed asset as a cost in the profit & loss account, reducing profit. This reflects the use of the asset as a cost during the useful life.

7. What is the Double-Entry for Depreciation on the Sale of an Asset?

When a business sells an asset, the net book value (cost less accumulated depreciation) needs to be removed from the balance sheet. Any sales proceeds will be offset against the net book value to establish whether there has been a profit or loss on the sale of the fixed asset.

Say, for example, a VAT registered business makes the credit purchase of a fixed asset for an invoice value of £15,000 including VAT, the double-entry to record the initial purchase would be:

It then sells the asset for £5,000 and has accumulated depreciation of £3,000. The double-entry on the sale of the asset would be:

  • Dr Bank £5,000
  • Dr Accumulated depreciation £3,000
    • Cr Fixed Assets £12,500
    • Cr Profit on sale of fixed assets £4,500

8. Is Depreciation Allowable for Corporation Tax?

Depreciation is not allowable for corporation tax. Depreciation rates vary from business to business meaning that one may choose a more aggressive depreciation rate than another and benefit from tax relief sooner. To make things fair between all businesses, depreciation is added back on the corporation tax computation and replaced by capital allowances.

9. Depreciation and Self-Assessment

Depreciation is not an allowable expense for self-assessment. Self-employed business owners must claim capital allowances and the annual investment allowance instead of depreciation.

But where self-employed individuals choose to use the cash basis when filling in their tax return, they can claim the full cost of the asset in the year they buy it**.

**different rules apply for cars

Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.

10. Depreciation Rate for Land of Buildings

In the UK it is generally accepted that land will always have a value of at least the same price it was purchased for, if not more. For this reason, it is common for land and buildings not to be depreciated in UK accounting.

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About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a website full of templates, guides and resources for UK sole traders. No faff. No confusion. Just simple straightforward advice on business registration, taxes and bookkeeping.