Depreciation Calculator
Calculate how much an asset depreciates each year. Supports straight-line and reducing balance methods.
Reviewed by Richard Ross · Last updated April 2026
How Depreciation Calculator works
Straight-line depreciation
Straight-line is the simplest and most common method. Annual depreciation = (Cost − Residual Value) ÷ Useful Life. The same amount is charged each year until the asset reaches its residual value. It is used for assets with steady economic benefit over time.
Reducing balance depreciation
Also called declining balance, this method applies a fixed percentage to the book value each year. Depreciation is higher in early years and lower in later years, reflecting assets that lose value more rapidly when new (e.g., vehicles, technology).
Depreciation vs capital allowances (UK)
Accounting depreciation and HMRC capital allowances are separate. For tax purposes, HMRC uses capital allowances (Annual Investment Allowance, Writing Down Allowance) rather than your accounting depreciation figures. The AIA limit is currently £1 million per year.
Useful life estimates
Common useful lives in UK accounting: computers and IT equipment 3–5 years; vehicles 3–5 years; machinery 5–15 years; office furniture 5–10 years; commercial buildings 25–50 years. The correct useful life should reflect the economic benefit period, not just physical life.
HMRC capital allowances: AIA and WDA
The UK tax system does not use accounting depreciation to calculate taxable profits. Instead, businesses claim capital allowances. The Annual Investment Allowance (AIA) allows 100% first-year deduction on qualifying plant and machinery up to £1 million per year. Expenditure above this, or on assets not qualifying for AIA, enters the main rate pool (18% Writing Down Allowance) or the special rate pool (6% WDA, for long-life assets, integral features, and solar panels). Electric cars qualify for a 100% first-year allowance.
Worked example: company vehicle
A UK limited company buys a petrol company car for £28,000 with a projected residual value of £8,000 after 4 years. Using straight-line depreciation: annual charge = (£28,000 − £8,000) ÷ 4 = £5,000/year. This appears in the profit and loss account. However, for Corporation Tax, cars with CO2 emissions of 1–50g/km attract an 18% WDA on the reducing balance pool; cars over 50g/km use the special rate at 6%. The tax relief will differ materially from the accounting depreciation — always consult your accountant for the precise tax position.
Source: HMRC — Capital allowances (gov.uk/capital-allowances). HMRC — Annual Investment Allowance (gov.uk/guidance/claim-capital-allowances). ICAEW — FRS 102 guidance on tangible fixed assets.
Frequently asked questions
What is the difference between straight-line and reducing balance?
Straight-line charges the same depreciation each year. Reducing balance charges more in early years and less later by applying a fixed rate to the declining book value. Both eventually write the asset down to its residual value.
What is residual value?
Residual value (salvage value) is the expected value of the asset at the end of its useful life. Depreciation only covers the difference between cost and residual value, not the full asset cost.
Does depreciation affect my tax bill?
Accounting depreciation does not directly reduce your UK tax bill. Instead, HMRC uses capital allowances, which can differ significantly. Consult your accountant for the tax treatment of specific assets.
What rate should I use for reducing balance?
Common rates: 25% for general plant and machinery (matches HMRC WDA main pool); 18% for some specific assets; 33.3% for computers and IT. If no rate is entered, this calculator calculates the rate needed to reach the residual value over the stated life.
Can I claim the Annual Investment Allowance (AIA) instead of depreciating an asset?
Yes — the AIA allows UK businesses to deduct up to £1 million of qualifying plant and machinery costs in full in the year of purchase for tax purposes. This is entirely separate from how the asset is depreciated in your accounts. Most small businesses will find that AIA covers all their capital purchases, meaning they get full tax relief in year one while still depreciating the asset over its useful life in their accounts.
How is a company car depreciated?
A company car is typically depreciated on a reducing balance basis (e.g., 25% per year) or straight-line over its expected useful life (typically 3–5 years). For tax purposes, the car goes into HMRC's capital allowance pool at either 18% or 6% depending on its CO2 emissions. Cars with zero emissions qualify for a 100% first-year allowance.
What assets can be depreciated?
Tangible fixed assets with a finite useful life can be depreciated: machinery, vehicles, computers, furniture, fixtures, and buildings (excluding land). Intangible assets such as patents, licences, and goodwill are amortised (a similar process). Land is not depreciated as it has an indefinite life. Inventory and investments are not depreciated — they are either expensed when sold or carried at cost/fair value.
What is the difference between accounting depreciation and HMRC capital allowances?
Accounting depreciation is calculated by the business to spread the cost of an asset over its useful life in the profit and loss account. Capital allowances are the tax deduction HMRC permits — they follow HMRC's own rates and rules (first-year allowances, writing-down allowances, annual investment allowance) and may differ significantly from accounting depreciation. Tax is calculated using capital allowances, not accounting depreciation, so the two figures often diverge.
How does depreciation affect cash flow?
Depreciation is a non-cash expense — it reduces profit on the P&L without reducing cash. This is why EBITDA (earnings before interest, tax, depreciation and amortisation) is used as a proxy for operating cash generation. The cash outflow occurred when the asset was purchased. Adding back depreciation to net profit gives a rough approximation of operating cash flow before working capital changes. This distinction matters for understanding true business liquidity.
What depreciation method should my business use?
The straight-line method (equal amounts each year) is simplest and most common for plant and equipment. The declining-balance method (higher depreciation in early years) better reflects assets that lose value quickly such as computers and vehicles. HMRC does not dictate which accounting method you use — you choose based on how closely you want accounting depreciation to match the actual economic consumption of the asset. The method must be applied consistently and disclosed in your accounts.
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