What is amortisation?
Amortisation is the gradual write-off of the cost of an intangible asset, such as goodwill, a licence or software, over the years the business benefits from it.
What amortisation means
Some things a business buys have value but no physical form: purchased goodwill, trademarks, licences, development costs and software. Rather than charge the whole cost in the year of purchase, the accounts spread it over the asset's useful life. That annual charge is amortisation. It is the intangible equivalent of depreciation for physical assets.
Under FRS 102, which most UK small companies follow, goodwill and other intangibles are amortised over their useful life. If that life cannot be reliably estimated, it must not exceed ten years. Most small businesses use the straight-line method, charging the same amount each year.
Example
An accountancy practice buys a client list from a retiring accountant for £60,000 and expects the benefit to last six years.
| Year | Amortisation charge | Value left on balance sheet |
|---|---|---|
| 1 | £10,000 | £50,000 |
| 2 | £10,000 | £40,000 |
| 3 | £10,000 | £30,000 |
| 6 | £10,000 | £0 |
Each year £10,000 is a cost in the profit and loss account, even though no cash leaves the bank after the purchase.
Why it matters for your business
Amortisation reduces reported profit without affecting cash, which is why EBITDA adds it back. If you bought a business, the amortisation of goodwill can make profits look lower than the trading reality.
The tax treatment is separate. For companies, most intangible assets acquired or created since April 2002 fall under the corporate intangibles regime, where the tax deduction usually follows the accounts. Goodwill has more restricted relief: since April 2019, relief is available at a fixed rate of 6.5% a year only where the goodwill is acquired with qualifying intellectual property. Take advice before buying a business.
Amortisation of loans
Outside accounting for assets, "amortisation" also describes paying off a loan in regular instalments that cover interest and capital. A repayment mortgage is an amortising loan.
In practice, most small businesses have few intangible assets. The common ones are goodwill on buying a business or a client list, a premium paid to take over a lease, and purchased software licences lasting several years. Monthly subscriptions such as Xero or Microsoft 365 are not intangible assets; they are ordinary running costs.
Common questions
Both spread an asset's cost over its useful life. Depreciation applies to physical assets such as vans and computers. Amortisation applies to intangible assets such as goodwill, licences and software. The calculation is usually the same straight-line method. The straight-line method spreads the cost evenly over the asset's life.
Sometimes. For companies, amortisation of most intangible assets follows the accounts for tax purposes, but goodwill relief is restricted. Sole traders get no deduction for amortisation itself. Your accountant will adjust the tax computation. Capital allowances may apply instead.