Depreciation vs Capital Allowances – What’s the Difference?

When running a business or managing rental property, one of the most common areas of confusion is depreciation and capital allowances. Both deal with the cost of assets like equipment, vehicles, or fixtures – but for tax purposes, they work very differently.

What is Depreciation?

Depreciation is an accounting concept.
It spreads the cost of an asset (such as a van, laptop, or piece of machinery) over its useful life.

For example:

• You buy a van for £20,000.
• You expect it to last 5 years.
• In your accounts, you might show depreciation of £4,000 per year.

👉 But here’s the catch – HMRC does not allow depreciation as a tax-deductible expense. It’s only for your financial accounts, not for your tax return.

What are Capital Allowances?

Instead of depreciation, HMRC gives businesses and landlords tax relief through capital allowances.

Capital allowances let you deduct the cost of qualifying assets from your taxable profits – reducing your tax bill.

Examples of qualifying assets include:
✅ Tools, equipment & machinery
✅ Vans and commercial vehicles
✅ Office furniture
✅ Fixtures in rental properties – like boilers, electrical systems, and integral features

Main Types of Capital Allowances

• Annual Investment Allowance (AIA): Lets you deduct the full cost of most assets (up to £1 million per year).
• Writing Down Allowance (WDA): For assets not fully deductible in the year of purchase, relief is spread over time.
• First-Year Allowances (FYA): For certain eco-friendly or energy-saving equipment.

Why the Difference Matters

If you claim depreciation instead of capital allowances, you’ll miss out on valuable tax relief – and risk errors in your tax return.

That’s why it’s important to get it right and make sure you’re claiming all the allowances available to you.

Key Takeaway

• Depreciation ❌ – not tax-deductible
• Capital Allowances ✅ – HMRC-approved way to claim tax relief

Getting this right can mean significant savings on your Corporation Tax or Income Tax bill.

📞 Need help making sure you’re claiming correctly?
At Taxes Done Right Ltd, we’ll review your accounts and ensure no relief is missed.

👉 Call 0161 710 1901 | ✉️ Email Tax@TaxesDoneRight.co.uk | 🌐 Visit www.taxesdoneright.co.uk | 💬 DM us today