Solar capital allowances 2026: AIA vs 50% FYA

Capital allowances are where a lot of the real return on a commercial solar installation is decided, and where most of the confusion sits. The rules are not complicated once you separate them properly, but the headline numbers thrown around online are frequently wrong. This guide sets out how capital allowances on solar panels actually work in 2026, why solar is treated differently from ordinary plant, and how the finance route you choose decides who keeps the relief.

We arrange the finance, not the installation — so our interest is narrow and specific: making sure the allowances and the export income stay with your business rather than leaking to a third party. That single point is worth more over the life of a system than most rate negotiations.

Why solar is special-rate, not main-rate

For capital allowances purposes, solar photovoltaic equipment is classed as an integral feature of a building. That places it in the special-rate pool, alongside things like electrical and lighting systems, rather than the main-rate pool that covers most loose plant and machinery.

This classification is the source of nearly every error you will read about solar capital allowances. It matters because the most generous relief available — 100% full expensing — applies only to main-rate qualifying expenditure. Solar, being special-rate, does not qualify for full expensing. We cover that trap in detail in does solar qualify for full expensing?, but the short version is: ignore any installer or article that promises full expensing on a solar system. It is simply not how the legislation works.

What solar does qualify for is still substantial — it just comes through two different mechanisms.

The two reliefs that actually apply

Annual Investment Allowance (AIA) at 100%

The Annual Investment Allowance gives 100% relief in year one on qualifying capital expenditure, up to £1 million per year. Special-rate expenditure, including solar, is eligible for the AIA. For the overwhelming majority of commercial installations — a typical warehouse, factory or farm roof costs well inside that £1m ceiling — this means you can write off the whole cost of the system against taxable profits in the first year.

At the current corporation tax position, a business paying tax at 25% effectively recovers a quarter of the system cost through the AIA alone, in the year of installation.

50% first-year allowance above the AIA cap

For larger projects, or for businesses that have already used their £1m AIA on other capital spending in the same year, special-rate solar expenditure also qualifies for the 50% first-year allowance (FYA). You claim 50% of the excess in year one, then the remaining balance enters the special-rate pool and is written down at 6% a year on a reducing-balance basis.

Both the AIA and the 50% FYA are permanent features of the regime — they are not time-limited reliefs you need to rush to beat a deadline. That removes the artificial urgency some salespeople attach to them.

A worked example

Take a £400,000 rooftop system on a single company that has not used its AIA elsewhere this year:

• The full £400,000 falls inside the £1m AIA ceiling.
• 100% is relieved in year one: a £400,000 deduction against taxable profit.
• At 25% corporation tax, that is £100,000 of tax saved in the first year.

Now take a £1.4m project in the same year:

• The first £1m is covered by the AIA at 100%.
• The remaining £400,000 qualifies for the 50% FYA: £200,000 relieved in year one.
• The other £200,000 enters the special-rate pool at 6% writing-down allowances thereafter.

These are illustrative — your own position depends on profits, group structure and what else you have bought in the year, so confirm the figures with your accountant. The principle holds: most commercial solar gets close to full first-year relief, but through the AIA and FYA, never through full expensing.

Who actually claims the allowances — it depends on the finance

This is the part that most directly affects which finance route you should choose, and it is the reason capital allowances belong in any honest financing conversation.

You only claim capital allowances on an asset your business owns. The finance structure decides ownership, and therefore who keeps the relief:

• Hire purchase, an equipment loan or cash purchase — your business owns the system (HP transfers title at the end, but allowances are available from installation). You claim the AIA or 50% FYA in full.
• Finance lease — the lessor usually claims the allowances, then passes the benefit back to you through lower rentals. The exception is a long-funding lease, where the lessee can claim. Rentals are deductible against profit in the meantime.
• Operating lease — you get no capital allowances, but the rentals are fully deductible as an operating cost.
• Power Purchase Agreement (PPA) — the third-party funder owns the system, so the funder claims the allowances and keeps the Smart Export Guarantee income from exported power. You simply buy electricity.

That last point is the crux of the asset finance versus PPA decision. Under a PPA you pay nothing up front, but you hand the entire tax relief and the export income to someone else for 15 to 25 years. Owning the system through asset finance keeps the allowances and the SEG income inside your business, while still spreading the cost. For a profit-making, tax-paying company that is almost always the stronger long-term position.

VAT and the 2026 FRS 102 change

Two further points an FD should have on the table.

VAT on the equipment is reclaimable by VAT-registered businesses regardless of route. The timing differs: with hire purchase or a loan you pay the VAT up front and reclaim it on the next return; with a lease the VAT is spread across the rentals. Note that the domestic 0% rating on solar does not apply to commercial supply.

FRS 102. Under the revised standard, for accounting periods beginning on or after 1 January 2026, most leases come on-balance-sheet for lessees as a right-of-use asset and a corresponding liability — short-term and low-value leases remain exempt. Operating leases that used to sit off-balance-sheet will now appear on it, which can affect gearing covenants. If covenant headroom matters to you, factor this in when comparing structures.

How this shapes the decision

For a tax-paying business, the capital allowances position usually points the same way: own the system. Hire purchase and equipment loans keep the AIA or 50% FYA and the export income with you, while still letting you fund the project over time rather than out of working capital. For a business that pays little or no tax — or genuinely cannot deploy capital — a PPA or operating lease can still be the right answer, because allowances you cannot use are worth nothing to you.

If you want to see how the relief changes the real cost of a system across the different routes, our capital allowances explainer sits alongside the finance calculator, and you can model the headline numbers on the cost page. For a structure recommendation tailored to your accounts and tax position, request a quote and we will set out, in pounds, which route keeps the most relief with your business.