Solar Panels Capital Allowances – Are They Tax Deductible?

capital allowance solar panels

Oliver Creevy

Ollie Creevy is a seasoned author with 5+ 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, green energy to help the UK government move towards their target of Net Zero by 2050. 

You can’t claim multiple capital allowances against the same solar panels, but you could be entitled to one of the following capital allowances:

     

      • 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 2021 up to and including 31 March 2026. It had been intended to end in March 2023, but was extended by a further 3 years. If you are considering solar panels for your business outside of the 50% SR, 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 (based on a company paying a Corporation Tax rate of 25%) 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 (25%)£600,000 x 0.25 = £150,000 (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 0.25 = £143,750 (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: 
    £150,000 – £143,750 = £6,250

    Since you’d be making savings of £6,250 through tax relief and capital allowances, you would actually only be paying £43,750 for the solar installation (£50,000 – £6,250= £43,750). 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 

    So long as you bought the solar panel installation new, specifically to be used at your business, and the total cost is below £1 million, then it ought to qualify for a capital allowance under the AIA. You’ll be able to deduct the full cost of 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 (25%)£600,000 x 0.25 = £150,000 (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 0.25 = £137,500 (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: 
    £150,000 – £137,500 = £12,500

    In real terms, you would only be paying £37,500 for the solar panel installation when you minus your tax savings from the cost of the installation (£50,000 – £12,500 = £37,500). 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 today. That means, whichever solar panel system you opt for at your business, you’ll be able to receive some tax relief 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 25% (or 19% if you are a smaller company with profits under £250,000). 

    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 5+ 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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