Everything UK businesses need to know about asset depreciation — methods, HMRC capital allowance rules, FRS 102 compliance, and typical depreciation rates by asset type for 2026.
A foundational concept every UK business owner and accountant needs to understand clearly.
Asset depreciation is the process of spreading the cost of a tangible fixed asset — such as machinery, vehicles, computers, or equipment — over its expected useful economic life. Rather than charging the full purchase price to your profit and loss account in the year of purchase, depreciation allocates that cost systematically each year, giving a fairer picture of annual profits and the true value of assets on your balance sheet.
Under UK GAAP (FRS 102) and IFRS, all tangible fixed assets with a finite useful life must be depreciated. The method chosen must reflect the pattern in which the asset's future economic benefits are consumed by the business. Once selected, the method must be applied consistently year to year unless there is a justified reason to change it.
It is important to understand that depreciation is an accounting concept — not a tax deduction. HMRC does not allow depreciation as a deductible expense. Instead, UK businesses claim capital allowances such as the Annual Investment Allowance (AIA), Writing Down Allowances (WDA), or the new 40% First-Year Allowance on their tax return. Use our UK Business Asset Depreciation Calculator to model both depreciation and capital allowances side by side.
FRS 102 permits several depreciation methods — the right choice depends on how your asset loses value over time.
Example: A £12,000 computer with a 3-year life and £0 residual value = £4,000/year depreciation.
Example: A £20,000 van at 25% reducing balance = £5,000 in Year 1, £3,750 in Year 2.
Example: A machine expected to produce 100,000 units; if 20,000 used in Year 1, depreciate 20% of the depreciable amount.
Current HMRC tax relief rates for UK businesses in the 2026/27 tax year — updated following the Autumn 2025 Budget.
Up to £1,000,000 per accounting period. Full first-year relief for qualifying plant & machinery. Excludes cars, gifted assets, and assets acquired from connected parties.
Reduced from 18% effective 1 April 2026 (Corporation Tax) / 6 April 2026 (Income Tax). Applied on reducing balance basis to the main plant & machinery pool.
Applies to integral building features (heating, lighting, plumbing), long-life assets (25+ year useful life), and thermal insulation. Rate unchanged for 2026.
New permanent First-Year Allowance from January 2026. Available to unincorporated businesses and leasing companies — not just incorporated companies using Full Expensing.
100% first-year relief on qualifying new plant & machinery. Available to companies within Corporation Tax only. Made permanent in the Autumn 2023 Budget.
Straight-line relief on qualifying new commercial structures and buildings from the date construction begins. Does not apply to land cost. Separate from plant & machinery allowances.
Typical accounting depreciation rates and methods used by UK businesses under FRS 102. Rates should reflect your specific asset's useful economic life.
| Asset Type | Typical Useful Life | Straight-Line Rate | Reducing Balance Rate | HMRC Pool / Allowance |
|---|---|---|---|---|
| Computers & IT Equipment | 3–5 years | 20–33% | 25–33% | Main Pool (AIA / FE / FYA) |
| Cars — Zero Emission (Electric) | 4–8 years | 12–25% | 25% | 100% First-Year Allowance |
| Cars — 1–50g/km CO₂ | 4–8 years | 12–25% | 20–25% | Main Pool (14% WDA from Apr 2026) |
| Cars — 51g/km+ CO₂ | 4–8 years | 12–20% | 15–20% | Special Rate Pool (6% WDA) |
| Commercial Vehicles (Vans / Lorries) | 5–8 years | 12–20% | 20–25% | Main Pool (AIA / FE / FYA) |
| Plant & Machinery (general) | 5–15 years | 7–20% | 14–25% | Main Pool (AIA / FE / FYA) |
| Long-Life Plant & Machinery (25+ yr) | 25–40 years | 2.5–4% | 6–10% | Special Rate Pool (6% WDA) |
| Furniture & Fixtures | 5–10 years | 10–20% | 15–20% | Main Pool (AIA / FE / FYA) |
| Leasehold Improvements | Over lease term | Over lease term | Rarely used | Main or Special Rate Pool |
| Integral Features (heating, electrical) | 15–25 years | 4–7% | 6–8% | Special Rate Pool (6% WDA) |
| Commercial Buildings / Structures | 25–50 years | 2–4% | Not typical | SBA (3% straight-line) — not plant |
| Intangible Assets (Patents, Licences) | Finite life only | Over useful life (max 10 yr if unknown) | Case-by-case | HMRC Intangibles Regime |
Rates are typical UK practice under FRS 102. Always confirm the appropriate rate with your accountant or refer to the FRC's FRS 102 standard for full guidance.
Follow these five steps to correctly account for asset depreciation in line with FRS 102 and HMRC rules.
Record the asset on your balance sheet at cost — including delivery, installation, and any non-recoverable VAT. Do not expense it to P&L at purchase.
Determine the asset's useful economic life and residual (salvage) value. Document the basis clearly for disclosure in your accounting policies note.
Select straight-line, reducing balance, or units of production — whichever best reflects how the asset is consumed. Apply consistently year to year.
Each year: Debit Depreciation Expense (P&L) and Credit Accumulated Depreciation (balance sheet). Net Book Value = Cost − Accumulated Depreciation.
Add back depreciation in your CT600 or SA100 tax computation, then separately claim AIA, WDA, or FYA to reduce your taxable profit with HMRC.
Understanding the difference is essential for accurate Corporation Tax returns and financial reporting.
Many UK business owners confuse accounting depreciation with HMRC capital allowances. While both relate to the cost of fixed assets, they serve completely different purposes and produce different figures. Depreciation is an accounting concept appearing in your profit and loss account and balance sheet; capital allowances are a tax relief claimed on your HMRC tax return only.
When preparing a Corporation Tax return (CT600), you must add back the depreciation charge shown in your accounts, then separately claim the appropriate capital allowances — such as AIA, WDA, Full Expensing, or the new 40% FYA — to arrive at your taxable profit. This adjustment is standard in any UK tax computation and creates a timing difference that may require deferred tax recognition under FRS 102.
| Feature | Accounting Depreciation | HMRC Capital Allowances |
|---|---|---|
| Purpose | P&L and balance sheet accuracy | Tax relief on Corporation Tax / Income Tax return |
| Governed by | FRS 102 / IFRS / UK GAAP | Capital Allowances Act 2001 + HMRC rules |
| Method | Chosen by the business (SL, RB, units) | Fixed by HMRC (AIA, WDA, FYA, Full Expensing) |
| Main rate (2026) | Varies — e.g. 20–33% for IT equipment | 14% WDA (from Apr 2026) or 100% AIA |
| Appears in | Statutory accounts (P&L + balance sheet) | Tax return only (CT600 / SA100) |
| Tax deductible? | No — added back in tax computation | Yes — reduces taxable profit directly |
| Cars eligible? | Yes (any method) | WDA only (not AIA or Full Expensing) |
Key FRS 102 requirements every UK accountant and business owner must follow when depreciating fixed assets.
Further calculators, guides and official sources to support your UK business accounting and tax planning in 2026.
Quick answers to common UK asset depreciation and capital allowance questions for 2026.