Depreciation Calculator

Depreciation spreads the cost of a tangible asset across its useful economic life, reflecting the value consumed each year. Straight-line depreciation takes the original cost less the estimated residual value and divides by the life in years, giving the same charge annually. It is the standard method for UK financial reporting under FRS 102, used by small and medium companies, with IFRS applying to listed groups. A £20,000 vehicle expected to be worth £2,000 after 5 years depreciates by £3,600 a year, so net book value runs £16,400, then £12,800, £9,200, £5,600 and finally £2,000, at which point the charge stops.

Reducing-balance depreciation applies a fixed percentage to the net book value at the start of each period, so the charge is largest when the asset is newest and tapers as the book value shrinks. Take the same £20,000 asset at a 25% rate: the first year charge is £5,000, leaving £15,000, the second £3,750, leaving £11,250, and the third £2,813. Doubling the straight-line rate produces the double-declining variant used for assets that lose value quickly. To land on a chosen residual, the rate is one minus the nth root of residual divided by cost, where n is the life in years.

Depreciation is an accounting entry rather than a cash payment, and it does not give tax relief. UK businesses claim capital allowances for that, and those follow entirely different rules and rates. What depreciation does affect is reported profit, balance sheet values and every ratio built on them, which is why companies must disclose their depreciation policies in the notes to the accounts. The useful lives applied in practice are fairly settled: 3 to 5 years for computers, 4 to 8 for vehicles, 5 to 10 for furniture and 25 to 50 for buildings.

On the tax side, the Annual Investment Allowance gives a 100% first-year deduction for plant and machinery up to £1,000,000 a year, made permanent in April 2023. Full expensing, available to companies only, allows a 100% first-year deduction on new main-rate assets and 50% on special-rate assets; it began in April 2023 and was made permanent at the 2023 Autumn Statement. Since 1 January 2026 a 40% first-year allowance also covers new main-rate plant bought by unincorporated businesses or for leasing. Cars are treated separately and cannot use the AIA at all. They attract 14% in the main pool where emissions are up to 50g/km or the car is zero-emission, and 6% in the special rate pool above that. New zero-emission cars keep a 100% first-year allowance on spending up to 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.

The two systems rarely agree, which is where deferred tax comes from. A £30,000 car might be depreciated at £6,000 a year on a straight line over 5 years in the accounts, while the tax computation uses a 14% reducing balance and gives £4,200 in the first year and £3,612 in the second. The difference sits on the balance sheet as deferred tax. Corporation Tax at 25%, or 19% at the Small Profits Rate, is charged on taxable profit rather than accounting profit, so depreciation is added back and capital allowances take its place.

For vehicles, the reducing-balance shape matches what happens in the market. Cap HPI data shows an average new car losing 15 to 25% in its first year and 50 to 60% over 5 years. Luxury models such as a BMW 7-series or an Audi A8 often shed 65 to 75% across the same period, while the strongest retainers, among them the Toyota Hilux, Land Rover Defender and Porsche 911, lose only 30 to 40%. Electric cars have been falling faster than petrol equivalents as battery technology moves on, with Tesla, Polestar and the Audi e-tron all down more than 50% over 3 years in 2025. Leasing hands that risk to the lessor.