Accounting

What is Amortisation?

Amortisation is like depreciation but for intangible assets (software, patents, goodwill). It spreads the cost over the asset's useful life.

Current Rate (2025/26)

N/A - varies by asset

Example

Buy software for £5k with 3-year useful life. Amortise £1,667/year.

Key Dates

Calculated at year end

How Amortisation Works in Practice

Amortisation is the accounting process of spreading the cost of an intangible asset over its estimated useful life. Intangible assets are non-physical assets that have value to the business -- common examples include purchased software, patents, trademarks, customer lists, licences, and goodwill arising from business acquisitions. The concept is identical to depreciation, but the term "amortisation" is used specifically for intangible assets.

For UK limited companies following FRS 102, intangible assets with a finite useful life must be amortised. If you cannot reliably estimate the useful life, a maximum of 10 years is assumed. Goodwill acquired in a business combination is also amortised over its useful life, with a maximum of 10 years if the life cannot be reliably estimated. This differs from international standards (IFRS), where goodwill is not amortised but tested for impairment annually.

The tax treatment of amortisation depends on the type of intangible asset and when it was acquired. For intangible assets acquired or created on or after 1 April 2002, the accounting amortisation charge generally is allowed as a tax deduction -- a significant difference from tangible assets, where depreciation is not allowable and must be replaced by capital allowances. However, there are exceptions and restrictions, particularly for goodwill acquired from related parties and for assets that existed before 2002. The rules are complex, and specific professional advice is usually needed.

Software is one of the most common intangible assets for small companies. If your company purchases bespoke software or a perpetual software licence, it is capitalised and amortised. However, annual software subscriptions (SaaS) are simply expensed each year and not capitalised. The distinction matters because capitalisation delays the expense over several years, while a subscription is an immediate deduction.

Step by Step

When you acquire an intangible asset, the cost is capitalised on your balance sheet. Each year, an amortisation charge is calculated and recorded as an expense on the P&L, reducing the asset's carrying value. The most common method is straight-line amortisation, spreading the cost evenly over the estimated useful life.

For example, if your company acquires a patent for £30,000 with a 10-year useful life, the annual amortisation charge is £3,000. After 5 years, the carrying value on the balance sheet would be £15,000 (£30,000 cost minus £15,000 accumulated amortisation).

At each year end, you should assess whether there are any indicators of impairment -- meaning the asset may be worth less than its carrying value. If an intangible asset becomes impaired (for example, a patent becomes less valuable because competing technology emerges), you write down the carrying value immediately, recording an impairment loss on the P&L. This is in addition to the regular amortisation charge.

Practical Tips

Maintain a schedule of all intangible assets showing cost, useful life, amortisation method, and accumulated amortisation
Distinguish clearly between capitalised software (perpetual licences, bespoke development) and expensed subscriptions (SaaS) -- the accounting treatment is different
Discuss the tax deductibility of your specific intangible assets with your accountant, as the rules vary depending on asset type and acquisition date
Review intangible assets annually for impairment indicators, especially technology assets that may become obsolete faster than expected

Common Mistakes to Avoid

Capitalising SaaS subscription costs when they should be expensed immediately -- only purchased or developed software should be capitalised
Using an inappropriately long useful life to minimise the annual amortisation charge, overstating asset values
Assuming amortisation is not tax-deductible like depreciation -- for many intangible assets acquired after 2002, the amortisation charge is allowable for Corporation Tax
Not performing impairment reviews on intangible assets that may have lost value

Frequently Asked Questions

Is amortisation tax-deductible?

For most intangible assets acquired or created on or after 1 April 2002, the amortisation charge is allowed as a Corporation Tax deduction. This is different from depreciation of tangible assets, which is not tax-deductible. However, there are exceptions, particularly for goodwill in certain transactions. Check with your accountant.

What useful life should I amortise software over?

Typically 3 to 5 years for software, reflecting the pace of technological change. If you are amortising a perpetual licence for well-established software, you might justify a longer period. Annual SaaS subscriptions should be expensed, not capitalised and amortised.

What is the difference between amortisation and impairment?

Amortisation is the systematic annual charge spreading the cost over the useful life. Impairment is an additional write-down when an asset's value has fallen below its carrying amount. You can have both in the same year -- the regular amortisation charge plus an impairment loss.

Do I amortise goodwill from buying a business?

Under UK FRS 102, yes. Goodwill is amortised over its estimated useful life, with a maximum of 10 years if you cannot reliably estimate the life. This reduces reported profit each year. The tax treatment of goodwill amortisation depends on the specific circumstances of the acquisition.

Should I capitalise development costs?

Under FRS 102, you can capitalise development expenditure if you can demonstrate technical feasibility, intention and ability to complete, ability to use or sell the asset, probable future economic benefits, and ability to measure costs reliably. If any condition is not met, the costs must be expensed.

Source: HMRC Corporate Intangibles Research and Development Manual: https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual

Related Terms

Depreciation

Depreciation is the accounting method of spreading the cost of a long-term asset over its useful life. It reduces your profit each year.

Goodwill

Goodwill is the value of a business above its net assets - representing things like reputation, customer relationships, and brand value.

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