Solar Tax Relief for Businesses: Capital Allowances Explained

How Tax Relief on Solar Works

When your business buys commercial solar panels, HMRC treats them as plant and machinery. That means you don’t simply write off the cost as an expense. Instead, you claim capital allowances, which reduce your taxable profits and therefore the tax you pay.

Because a solar system is a long-life asset, it’s classed as a special rate asset. The way you claim relief depends on which allowances are available to your business.

The Annual Investment Allowance (AIA)

The AIA is usually the simplest and most valuable relief. It lets most businesses deduct 100% of qualifying spending on plant and machinery, up to £1 million a year, from their taxable profits in the year the money is spent.

• Available to companies, sole traders and partnerships.
• Covers special rate assets like solar panels.
• Groups of companies share a single £1 million limit.

First-Year Allowances for Companies

Companies paying corporation tax may also be able to claim a 50% first-year allowance on new and unused special rate assets. This helps when spending goes over the AIA limit. The other 50% then goes into the special rate pool.

Writing Down Allowances

Any spending not covered by the AIA or a first-year allowance goes into the special rate pool, where you claim a writing down allowance of 6% a year on whatever is left in the pool each year. This spreads the relief over many years, which is why the AIA is usually more attractive.

Worked Example

A profitable limited company paying corporation tax at 25% installs a £100,000 solar system and claims it under the AIA.

The actual tax saving depends on your profits and tax rate. Companies paying the lower small profits rate, or businesses with lower profits, will see a smaller saving.

VAT on Commercial Solar

The 0% VAT rate on solar applies to homes, not businesses. Commercial installations are charged at the standard rate of 20%. If your business is VAT-registered and the system is used for your taxable business activities, you can normally reclaim that VAT in the usual way.

Business Rates

In England, eligible equipment used for on-site renewable energy generation and storage, such as rooftop solar panels and batteries, is currently exempt from business rates until March 2035. That means adding solar shouldn’t increase your business rates bill in most cases.

Rules differ in Scotland and Wales, so check the position for your property, especially for larger or ground-mounted systems.

What About PPAs and Finance?

• Solar PPA: the funder owns the system, so they claim the capital allowances. You benefit through a lower electricity price instead.
• Hire purchase: you can usually claim capital allowances as if you’d bought the system, even though you pay over time.
• Leasing: treatment depends on the type of lease. Your accountant can confirm the position.

Compare the options in our PPA vs buying outright guide.

Frequently Asked Questions