What is the difference between depreciation and Capital Allowances?

Most expenses incurred by business are written off during the year, but some relate to assets that are used for several years, for example, vehicles and computers. Because they last for several years, you can allocate a portion of the cost to each annual set of accounts. This allocation process is called ‘depreciation’. For instance, you might say the useful life of a computer is 3 years so you would assign a third of the value to each year. It is a misconception that you can get more tax relief by using a higher depreciation figure in your accounts. HMRC have their own version of depreciation which is called Capital Allowances. Since 1st January 2019, you can get full tax relief on up to £1m spent on fixed assets in a single tax year which is very good news for small businesses.


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