It lowers your accounting profit but not your tax bill. Here is the crucial UK quirk every business owner trips over, and what HMRC uses instead.
Here is a fact that surprises almost every new business owner: depreciation, the figure your accounts use to spread the cost of your van or laptop over several years, does nothing for your tax bill. It lowers the profit shown in your accounts, then gets added straight back when you calculate tax. HMRC ignores it entirely and offers its own system instead. Understanding this split between accounting and tax is the single most important thing to grasp about depreciation in the UK.
When you buy something that lasts more than a year — equipment, vehicles, computers, furniture — accounting standards say you should not expense the whole cost in one go. Instead you spread it across the asset's useful economic life. Buy a £6,000 machine you expect to use for five years, and a sensible approach charges £1,200 against profit each year. That annual charge is depreciation.
There are several methods (straight-line, reducing balance, units of production), and the business chooses which to use and over what period. That flexibility is precisely why the taxman does not trust it for tax: two identical businesses could show very different profits simply by picking different depreciation policies.
In a UK tax computation, you start from the accounting profit shown in your profit and loss statement, then add depreciation back, because it is not an allowable deduction. In its place you claim capital allowances — HMRC's standardised system of tax relief on capital assets. The headline relief is the Annual Investment Allowance (AIA), which gives 100% tax relief on up to £1 million of qualifying plant and machinery in 2025/26, plus writing-down allowances (typically 18% main rate or 6% special rate, reducing balance) for spend above that or in assets that do not qualify for the AIA.
Greenline Ltd, a small landscaping company, has accounting profit of £80,000 for the year to 5 April 2026. That profit is after a £4,000 depreciation charge on equipment, and during the year the company bought a new £20,000 ride-on mower that qualifies for the Annual Investment Allowance.
| Step | Amount |
|---|---|
| Accounting profit | £80,000 |
| Add back depreciation (disallowed) | +£4,000 |
| Adjusted profit | £84,000 |
| Less AIA on the £20,000 mower | -£20,000 |
| Taxable profit | £64,000 |
The depreciation is stripped out and replaced by capital allowances. Here the company actually gets more relief than its accounts showed (the full £20,000 mower cost up front via AIA, versus a small depreciation charge), which is common in the year of a big purchase. Corporation Tax is then charged on the £64,000 — estimate it with the Corporation Tax calculator.
Not every asset gets relief. Land is never depreciated and never attracts capital allowances. Most buildings are excluded too, though qualifying construction and renovation costs may attract the separate Structures and Buildings Allowance at 3% a year. Assets you only lease rather than own follow different rules. And remember that for sole traders on the cash basis, most equipment is simply expensed when paid for, so depreciation and the add-back rarely arise — the cash-basis simplicity replaces the whole exercise.
It would be far simpler to let businesses deduct their own depreciation. But that would let companies inflate or deflate taxable profit by changing accounting policies. By disallowing depreciation and granting standardised capital allowances instead, HMRC ensures every business gets relief on the same terms, at rates Parliament controls — and can use those rates as a policy lever, as it did with the AIA and the more recent full-expensing regime for companies.
Depreciation tells you how an asset is wearing out in your accounts. Capital allowances tell you what HMRC will let you deduct. In the UK, only the second one touches your tax bill.
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