Solar Panels Capital Allowances

capital allowance solar panels

Oliver Creevy

Ollie Creevy is a seasoned author with 4+ years of experience in writing home improvement content, focusing in particular on renewable energy, ECO grants and solar panels. His expertise has been featured on MSN, MIC, Bustle, and other platforms. As an author at Business Solar UK, he remains at the forefront of promoting cleaner, more efficient energy solutions for a brighter and more sustainable world.

If you’re looking into solar panels for your business, then you’re probably already aware that solar panels class as ‘plant and machinery’ that your business can claim capital allowances on. This saves you money on the cost of the installation thanks to the tax relief that capital allowances afford your business. But what are the different solar panels capital allowances available? 

Below we’ll cover the main capital allowances for solar panels – but remember – you can only claim for one capital allowance, even if your solar installation qualifies for more than one. 

What Solar Panels Capital Allowances Are Available To Me?

As a business who is investing in solar panels, you’re entitled to a capital allowance that provides you with a tax break. This is to encourage more businesses to switch to renewable energy to help the UK move closer to Net Zero carbon targets by 2050. 

While solar panels qualify for tax breaks, you can’t claim multiple capital allowances against the same solar panels, but you could be entitled to one of the following:

  • 50% Special Rate First Year Allowance
  • Annual Investment Allowance 

 

What Is The 50% Special Rate First Year Allowance?

IMPORTANT: The 50% Special Rate (SR) first year allowance can be claimed on solar panels purchased for your business between 1 April 2023 up to and including 31 March 2026. That means new commercial solar panels for your business won’t be available under special rate expenditure if you purchase them outside of these dates. If that’s the case, head to the section on the Annual Investment Allowance below. 

How The 50% Special Rate First Year Allowance Works

To claim the 50% SR first year allowance you’ll need to have bought new and unused solar panels – second hand installations aren’t covered here. This lets you deduct 50% of the cost of your solar panels from your profits before tax. 

Worked Example

Below we’ll work through an example to show how much the 50% SR could save you on the cost of installing solar panels at your business.

Profit Before Tax£600,000
Corporation Tax (19%)£600,000 x 0.19 = £114,000 (you would pay this in taxes)
Solar Investment Cost£50,000
50% SR First Year Allowance Deduction£50,000 x 0.5 = £25,000 (your 50% capital allowance)
Profit – 50% DeductionTo work out your new profit, you take away the capital allowance deduction from the total profit: 
£600,000 – £25,000 = £575,000 (your new operating profit)
New Operating Profit Corporation Tax £575,000 x 0.19 = £109,250 (the new taxes you would pay)
Tax Savings With 50% SR AllowanceTo work out how much you’ve saved in tax relief, simply take away the new tax you’ll pay from the old taxes you would have paid: 
£114,000 – £109,250 = £4,750

Since you’d be making savings of £4,750 through tax relief and capital allowances, you would actually only be paying £45,250 for the solar installation (£50,000 – £4,750 = £45,250). That’s a significant saving! 

What Is The Annual Investment Allowance? 

Perhaps the most relevant capital allowance for solar panels for most people is the Annual Investment Allowance. Better yet, the Annual Investment Allowance (AIA), allows you to deduct 100% of the cost of a solar installation from your profits, effectively making the installation 19% cheaper for your business. AND there are no date limitations as with the 50% SR allowance, so this will be a much better capital allowance to claim for most businesses. 

How The Annual Investment Allowance Works 

As long as you bought the solar panel installation new, specifically to be used at your business, and the total cost is below the £1 million threshold, then it ought to qualify for a capital allowance under the AIA. You’ll be able to deduct the full cost of your capital expenditure spent on the solar panel installation from your profits. 

You can also only claim AIA on the period in which you bought your solar panels. The date you bought it is either the day you signed the contract if payment is due within less than 4 months, or when payment is due, if it’s due more than 4 months later.

Worked Example

To help you understand the difference AIA can make to your solar installation, we’ve put together an example for you below.

Profit Before Tax£600,000
Corporation Tax (19%)£600,000 x 0.19 = £114,000 (you would pay this in taxes)
Solar Investment Cost£50,000
Profit – 100% of solar investment costTo work out your new profit, you take away the capital allowance deduction from the total profit – in this case the capital allowance deduction is 100% of the cost: 
£600,000 – £50,000 = £550,000 (your new operating profit)
New Operating Profit Corporation Tax £550,000 x 0.19 = £104,500 (the new taxes you would pay)
Tax Savings With AIATo work out how much you’ve saved in tax relief, simply take away the new tax you’ll pay from the old taxes you would have paid: 
£114,000 – £104,500 = £9,500

In real terms, you would only be paying £40,500 for the solar panel installation when you minus your tax savings from the cost of the installation (£50,000 – £9,500 = £40,500). As you can see, if you qualify for AIA, then it’s well worth applying for this capital allowance over the 50% SR allowance because you double your savings! 

Which Solar Panels Are Covered By Capital Allowances?

Both main solar panel types – solar thermal systems (which heat water for your business) and solar photovoltaic systems (which generate electricity for your business) – are covered by the capital allowances we’ve discussed. That means, whichever solar PV system you opt for for your business, you’ll be able to receive some tax relief on your expenditure on solar panels via capital allowances. 

Solar Panels Capital Allowances Summary

As a business owner looking to invest in solar panels for your business, it makes sense that you would want to find out the best ways to save money on your installation. And solar panels capital allowances can certainly help you there – with AIA essentially reducing the cost of your solar panel installation by 19%. 

With energy prices at the levels they have been, making use of solar technologies to generate your own electricity or to even provide hot water for your business, can bring long-term savings. If you are able to have this installed and offset part of the cost through plant and machinery allowances, this can make solar a much more affordable option.

You can also save even more on the cost of your solar installation by comparing solar suppliers with Business Solar UK. When you work with us, we compare the best business solar installers in your area with the best deals so you can be confident you’re saving big with us in addition to the capital allowances you can claim, too.

Oliver Creevy

Ollie Creevy is a seasoned author with 4+ years of experience in writing home improvement content, focusing in particular on renewable energy, ECO grants and solar panels. His expertise has been featured on MSN, MIC, Bustle, and other platforms. As an author at Business Solar UK, he remains at the forefront of promoting cleaner, more efficient energy solutions for a brighter and more sustainable world.

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