Accounting DepreciationAccounts
The expense recorded in a business’s accounts to spread the cost of a tangible fixed asset over its useful life. It reduces profit and net book value, but it is not the same as the tax deduction claimed from HMRC.
A plain-English glossary for UK drivers, small businesses and accountants. Learn the meaning of car depreciation, asset depreciation, residual value, AIA, WDA, net book value, capital allowances and other common depreciation terms.
Depreciation is simple in theory, but UK accounting, tax and vehicle finance use different words for very similar ideas.
Depreciation describes how an asset loses value over time, but the exact meaning depends on context. In accounting, depreciation is a charge in the profit and loss account that spreads the cost of a tangible fixed asset over its useful life. In tax, HMRC normally ignores accounting depreciation and uses capital allowances instead. In car finance, depreciation usually means the difference between what a vehicle costs today and what it is expected to be worth later.
That is why the same phrase can feel confusing. A company car may have a net book value in the accounts, a tax written down value in the capital allowance pool, a market value at a dealer and a guaranteed future value in a PCP agreement. Each number is useful, but each one answers a different question. This A–Z glossary helps you understand those differences before you rely on a depreciation calculator or make a purchase decision.
The definitions below are written for UK users in 2026. They cover practical terms used in fixed asset registers, business asset depreciation, car depreciation calculators, HMRC capital allowance schedules, vehicle residual value forecasts and everyday accounting reports. You can scan the list alphabetically or use the search box to find a term quickly.
Browse the most common UK depreciation, fixed asset, capital allowance and car value terms.
The expense recorded in a business’s accounts to spread the cost of a tangible fixed asset over its useful life. It reduces profit and net book value, but it is not the same as the tax deduction claimed from HMRC.
The total depreciation charged against an asset from the purchase date to the reporting date. It is shown against cost in the fixed asset register and explains why the net book value is lower than original cost.
The equivalent of depreciation for intangible assets such as goodwill, software licences, patents or customer lists. In UK accounts, amortisation spreads the cost of a non-physical asset over the period it is expected to generate value.
A UK capital allowance that gives 100% tax relief on qualifying plant and machinery, up to the annual limit. Cars do not qualify for AIA, but vans, tools, equipment and many business assets usually can.
A group of similar fixed assets, such as vehicles, IT equipment, fixtures, machinery or buildings. Grouping assets helps businesses choose consistent depreciation methods, useful lives and capital allowance treatment.
An additional tax deduction that may arise when an asset is sold or a pool is closed and the tax written down value is higher than the disposal proceeds. It brings forward the remaining tax relief.
A taxable adjustment that can arise when disposal proceeds are higher than the tax written down value of an asset or pool. It reverses part of the capital allowance relief previously claimed.
A large final payment due at the end of some hire purchase or PCP agreements. It is normally linked to the car’s expected residual value and keeps monthly instalments lower during the contract.
The value of an asset in the accounts after deducting accumulated depreciation. Book value is also called carrying amount or net book value and can be very different from the asset’s market value.
HMRC’s tax relief system for business assets. Because accounting depreciation is not normally deductible for tax, businesses add it back and claim capital allowances such as AIA, FYA, WDA or SBA instead.
Spending on long-term assets that will be used in the business for more than one accounting period. Examples include vans, laptops, production equipment, office furniture and certain building improvements.
The cost recorded as a fixed asset on the balance sheet rather than expensed immediately. Capitalised cost may include purchase price, delivery, installation and directly attributable costs needed to bring the asset into use.
The amount a car loses in value between purchase and resale. In the UK, depreciation is usually driven by age, mileage, condition, fuel type, brand demand, specification and wider used-car market conditions.
Another term for net book value. It is the amount at which an asset is carried in the accounts after accumulated depreciation and impairment losses have been deducted from cost.
The part of an asset’s cost that will be depreciated over time. It is normally calculated as original cost minus expected residual value, then allocated across the useful life of the asset.
The systematic allocation of the cost of a tangible asset over its useful life. For consumers, the word often means the reduction in resale value of a car, van or other asset over time.
The formula used to calculate annual depreciation. Common methods include straight-line, reducing balance and units of production. The chosen method should reflect how the asset’s economic benefits are consumed.
The annual percentage applied to calculate depreciation. A rate can be used directly, such as 25% reducing balance, or implied by a useful life, such as five years straight-line.
The money received when an asset is sold, scrapped, traded in or otherwise disposed of. Disposal proceeds are important for capital allowance calculations because they reduce the pool or trigger balancing adjustments.
The total period over which an asset is expected to be economically useful, not just physically usable. A laptop may still work after five years, but its economic life may be shorter because technology becomes obsolete.
A 100% first-year allowance available for qualifying new zero-emission cars and certain EV charging equipment. Second-hand electric cars do not receive the same treatment and normally use writing down allowances.
A per-mile charge applied when a leased or PCP vehicle exceeds the agreed mileage limit. It reflects the extra depreciation and wear caused by driving more miles than the contract expected.
An estimate of the price that would be received to sell an asset in an orderly transaction between market participants. Fair value may be relevant for some accounting measurements but is not the same as depreciation cost.
A capital allowance that gives enhanced tax relief in the year an asset is purchased. Some FYAs give 100% relief, while other targeted allowances may give a lower percentage for qualifying assets.
A detailed list of a business’s long-term assets, including purchase cost, date, depreciation, location, serial number, status and disposal information. It supports accounts, tax claims, insurance and internal controls.
A capital allowance for qualifying companies that allows the full cost of certain new main-rate plant and machinery to be deducted in the year of purchase. It is separate from ordinary accounting depreciation.
The minimum future value set by a finance company in a PCP agreement, assuming the car is returned in acceptable condition and within the mileage limit. It is closely linked to forecast depreciation.
The original cost of an asset before accumulated depreciation is deducted. Businesses often show gross book value, accumulated depreciation and net book value together in fixed asset notes.
A finance arrangement where the customer pays for a vehicle over time and usually owns it after the final payment. The vehicle depreciates during the agreement even though the finance balance may fall at a different speed.
A blended capital allowance rate used when an accounting period spans a tax rate change. The effective rate is calculated by weighting the old and new rates according to the days in each part of the period.
A write-down recorded when an asset’s recoverable amount falls below its carrying amount. Impairment is separate from routine depreciation and may be needed after damage, obsolescence or a market value collapse.
Certain building systems that are treated as special-rate assets for capital allowances, such as electrical systems, heating, air conditioning, lifts and water systems. They usually receive a lower annual writing down allowance.
The part of a lease rental that reflects the vehicle’s expected loss in value over the contract term. The lessor estimates future value and prices the monthly rental around that depreciation risk.
The manufacturer’s recommended retail price before discounts, options or finance incentives. Depreciation is often compared against list price, but real-world loss may differ if the car was bought with a large discount.
The typically faster early value loss seen on expensive prestige or performance cars. Large options, high running costs and smaller used-buyer pools can make depreciation steeper than on mainstream models.
The general capital allowance pool for most plant and machinery and low-emission business cars that do not receive full relief immediately. Writing down allowance is claimed each year on the pool balance.
The price an asset could reasonably achieve in the open market at a given date. For cars, market value depends on condition, mileage, service history, demand, colour, fuel type and local supply.
A valuation adjusted for whether a vehicle’s mileage is above or below typical mileage for its age. Higher mileage usually reduces value because it implies more wear and a shorter remaining useful life.
The asset’s cost less accumulated depreciation and impairment. NBV is an accounting measure used on the balance sheet, not a guarantee of resale value or a formal valuation.
A small residual amount left in the fixed asset register for a fully depreciated asset that is still in use. Some businesses keep £1 or another nominal amount for control purposes.
Loss of usefulness because an asset has become outdated, inefficient or unsuitable. Obsolescence is a major reason why computers, phones, manufacturing equipment and older vehicle technology depreciate over time.
The tax written down value remaining in a capital allowance pool after additions, allowances and disposals. The pool balance is carried forward and used to calculate next year’s writing down allowance.
A reduction applied when a sole trader or partner uses a business asset partly for private purposes. Limited companies usually treat private car use differently through benefit-in-kind rules rather than restricting the company’s allowance.
A depreciation method that applies a fixed percentage to the remaining carrying value each year. It produces higher charges in early years and lower charges later, which often suits vehicles and technology assets.
The estimated amount an asset will be worth at the end of its useful life or finance term. Residual value reduces the depreciable amount and is central to lease and PCP pricing.
An accounting adjustment that restates an asset to a current valuation where the revaluation model is used. It is not the same as normal depreciation and requires consistent treatment for the asset class.
The expected amount recoverable from selling an asset for parts, materials or salvage at the end of its useful life. It is a form of residual value, usually small for worn-out equipment.
An asset placed in a single-asset pool because the business expects to sell or scrap it within a shorter period. This can help accelerate final tax relief when the asset is disposed of.
A capital allowance pool for assets such as high-emission cars, integral features and long-life assets. It receives a lower annual writing down allowance than the main pool, so relief is spread over longer.
A method that charges the same amount of depreciation each year. It is calculated as cost minus residual value divided by useful life, making it simple for furniture, buildings and predictable-use assets.
The value of an asset or pool remaining after capital allowances have been claimed. It is the tax equivalent of a carrying balance and may not match the accounting net book value.
The price a dealer offers when taking your existing vehicle as part payment for another car. It is usually lower than private sale value because the dealer needs margin and must manage resale risk.
The period over which management expects to use an asset and benefit from it. Useful life should be reviewed if circumstances change, such as heavy use, damage, new technology or a shift in business plans.
An estimate of what a car or van will be worth at the end of a finance, lease or fleet replacement period. Accurate forecasts help compare total cost of ownership, not just monthly payment.
Normal deterioration from ordinary use, such as tyre wear, minor interior marks and age-related condition changes. Finance companies separate fair wear and tear from damage that creates extra end-of-contract charges.
An annual capital allowance claimed on the remaining balance of a tax pool. WDA gives tax relief gradually where an asset has not already been fully relieved by AIA, FYA or another allowance.
The value left after depreciation or capital allowances have been deducted. In tax, written down value is the pool balance carried forward; in accounts, similar wording may refer to net book value.
These pairs are often mixed up, especially when comparing accounting records with tax and market values.
| Term Pair | Main Difference | Practical Example |
|---|---|---|
| Depreciation vs Capital Allowances | Depreciation is the accounting charge. Capital allowances are the tax relief HMRC allows instead. | A van may be depreciated over five years in accounts but claimed using AIA or WDA for tax. |
| Net Book Value vs Market Value | NBV is an accounting figure. Market value is what the asset could sell for today. | A laptop may have an NBV of £300 but a resale value of only £120. |
| Residual Value vs Guaranteed Future Value | Residual value is an estimate. GFV is a contractual figure in a PCP agreement. | A finance company may guarantee a car at £12,000 after three years if conditions are met. |
| Straight-Line vs Reducing Balance | Straight-line uses equal annual charges. Reducing balance charges more in early years. | Cars and IT equipment often fit reducing balance; furniture and buildings often fit straight-line. |
| Useful Life vs Economic Life | Useful life is the period the business expects to use the asset. Economic life may be longer or shorter across the market. | A business may replace phones every three years even if they physically last longer. |
Keep these rules in mind when using depreciation terminology in UK calculations.
For UK tax computations, businesses normally add back depreciation and claim capital allowances. That is why a profit figure in accounts can differ from taxable profit.
Business cars are treated by CO₂ emissions and whether the car is new and zero-emission. They do not follow the same AIA route as ordinary plant and machinery.
A register links cost, depreciation, location, disposal proceeds and tax pool treatment. It makes year-end accounts and capital allowance schedules easier to support.
Use the glossary alongside practical calculators for cars, business assets and capital allowances.
Answers to common questions people ask after reading UK depreciation and capital allowance terms.