Capital allowances on commercial solar

Solar is special-rate expenditure — this is the crucial fact

HMRC's capital allowances manual is explicit: the installation of solar panels is special-rate expenditure (it sits with integral features and long-life assets). That single classification drives everything else, and it's the fact most commercial solar sales material gets wrong.

The headline 100% relief many businesses have heard of — full expensing — applies only to main-rate plant and machinery. Because solar is special-rate, full expensing does not apply to it. Anyone telling you a solar system gets 100% full expensing is mistaken. What solar does get is still very generous; it just comes through two different routes.

Route one: the Annual Investment Allowance (100%)

The Annual Investment Allowance (AIA) lets a business deduct 100% of qualifying capital spend from its taxable profits in the year of purchase, up to a limit that is now permanently set at £1m per year. Solar PV qualifies. So for the great majority of commercial installs — which fall well under £1m — the AIA delivers effectively 100% relief in year one.

For a profitable limited company paying the 25% main rate of corporation tax, a £160,000 system claimed under AIA reduces the tax bill by up to £40,000. The relief is a function of your tax rate, so a company in the marginal band or paying the 19% small-profits rate gets proportionally less — your accountant will confirm the exact figure.

Route two: the 50% first-year allowance (above the AIA cap)

If your solar spend in a year exceeds the £1m AIA limit — a large ground-mount scheme, say, or several sites at once — the excess special-rate expenditure qualifies for the 50% first-year allowance. You deduct 50% of that cost in year one, then claim 6% writing-down allowances on the remaining balance in later years.

Both the 50% first-year allowance and full expensing were introduced at Spring Budget 2023 with a sunset date of 1 April 2026. The Autumn Finance Bill 2023 removed that sunset, making both permanent — so you can plan around them with confidence.

The part everyone forgets: the finance structure decides who claims

You can only claim capital allowances on an asset you are treated as owning. That makes the funding route decisive:

• Hire purchase: HMRC treats you as the owner from the start, so you claim the full allowances as if you'd paid cash. The instalments of capital are ignored for allowances.
• Equipment loan / cash purchase: you own the system outright, so you get the full allowances.
• Finance lease: the lessor is the legal owner and normally claims the allowances, reflecting the benefit in lower rentals — unless it's a long-funding lease, where the lessee can elect to claim.
• Operating lease: no allowances for you, but the rentals are a fully deductible revenue expense.
• PPA: the third-party owner claims the allowances and keeps the export income. You just buy the power.

This is the single biggest reason a profitable business is usually better off owning its system through asset finance than signing a PPA: the relief is worth real money, and only the owner can claim it. We lay out the full comparison in asset finance vs PPA.

VAT and the SEG, briefly

VAT on the equipment is reclaimable by VAT-registered businesses regardless of route; on hire purchase and loans it's paid up front, while leases spread it across the rentals. Separately, the Smart Export Guarantee pays the system owner for exported electricity — another benefit that stays with you under asset finance but goes to the funder under a PPA.

A note on accuracy

Capital allowances interact with your wider tax position — other AIA claims, profit levels, group structure and timing all matter — so the figures above are the framework, not advice for your specific company. We model the allowances into every finance proposal and hand your accountant a clean summary to confirm. This guide reflects the rules as at June 2026; the authority for the special-rate treatment is HMRC's capital allowances manual at CA22335.