Capital Allowances on Commercial Solar: How to Claim 100% Tax Relief
The Annual Investment Allowance means UK businesses can reduce their net solar investment by 25% in year one. Here is everything you need to know about claiming capital allowances on commercial solar panels, battery storage, and EV chargers.
Key figures at a glance
- AIA limit: £1,000,000 per year (100% first-year deduction)
- Full Expensing: No cap for companies — permanent from 2023
- Corporation Tax saving: 25p per £1 at main rate (19p for small profits)
- Business rates exemption: 10 years on new rooftop solar
- Effective cost reduction: 25–35% before any electricity savings
What Are Capital Allowances?
When a business spends money on equipment — machinery, vehicles, computers, solar panels — it cannot simply deduct the full cost from its taxable profits in the year of purchase under normal accounting rules. Instead, the asset is depreciated over its useful life. Capital allowances are the tax system's alternative: they allow businesses to deduct qualifying expenditure from taxable profits, either immediately (through the Annual Investment Allowance or Full Expensing) or over time (through Writing Down Allowances).
For commercial solar installations, the combination of the Annual Investment Allowance and the permanent Full Expensing regime introduced in 2023 means most UK businesses can deduct the entire cost of a solar system from their taxable profits in the year of installation. At the current main Corporation Tax rate of 25%, this creates an immediate tax saving of 25p for every £1 invested.
The Annual Investment Allowance (AIA)
The Annual Investment Allowance allows businesses to deduct 100% of qualifying plant and machinery expenditure from their taxable profits in the year of purchase. The current AIA limit is £1 million per year, set permanently at this level since 2023.
Solar panels, inverters, battery storage systems, mounting structures, cabling, monitoring equipment, and all associated installation costs qualify as plant and machinery. This means a business installing a £300,000 commercial solar system can deduct the full £300,000 from its taxable profits in year one, saving £75,000 in Corporation Tax at the main rate.
The AIA applies to sole traders and partnerships as well as limited companies, and covers both new and second-hand equipment. There is no requirement for the installation to be new — retrofit solar on an existing building qualifies equally with new-build solar.
AIA Worked Example
| System size | Gross cost | AIA deduction | Tax saved (25%) | Net cost |
|---|---|---|---|---|
| 50kW | £42,000 | £42,000 | £10,500 | £31,500 |
| 100kW | £85,000 | £85,000 | £21,250 | £63,750 |
| 250kW | £210,000 | £210,000 | £52,500 | £157,500 |
| 500kW | £400,000 | £400,000 | £100,000 | £300,000 |
Assumes main rate Corporation Tax at 25%. Small profits rate (19%) applies to companies with profits under £50,000.
Full Expensing: No Cap for Companies
For limited companies subject to Corporation Tax, Full Expensing provides an additional route to 100% first-year relief with no monetary cap. Introduced in the Spring Budget 2023 and made permanent in the Autumn Statement 2023, Full Expensing allows companies to deduct 100% of qualifying new plant and machinery expenditure from taxable profits in the year of purchase.
The key difference from the AIA is that Full Expensing has no £1 million annual limit. A company installing a £1.5 million solar array — common on large logistics warehouses and distribution centres — can claim full first-year relief under Full Expensing rather than being limited to the £1 million AIA cap with Writing Down Allowances on the remaining £500,000.
Full Expensing currently applies to new (not second-hand) plant and machinery. For the vast majority of commercial solar installations, which use new equipment, this restriction has no practical effect.
What Qualifies? A Comprehensive List
The following items routinely qualify as plant and machinery for capital allowances purposes when forming part of a commercial solar installation:
- Solar PV panels (all technologies — monocrystalline, polycrystalline, bifacial)
- String inverters, microinverters, and power optimisers
- Battery storage systems (AC-coupled and DC-coupled)
- Roof mounting systems (aluminium rails, clamps, ballasted frames)
- Ground-mounted steel frames and piling
- DC cabling, connectors, and DC isolators
- AC cabling from inverter to distribution board
- Generation meters and export meters
- Monitoring systems, data loggers, and remote monitoring subscriptions (hardware element)
- EV chargers installed alongside or powered by the solar system
- Grid connection equipment (cutout upgrade, DNO connection works)
- G98 and G99 application fees paid to UK Power Networks
- Scaffold hire for installation (if directly incurred)
- Installation labour costs (as part of the overall capital expenditure)
Structural work that reinforces a roof to carry solar panels may qualify separately under the Structures and Buildings Allowance at 3% per year, rather than under the AIA or Full Expensing.
The Business Rates Exemption
In addition to capital allowances, businesses installing rooftop solar benefit from a 10-year business rates exemption on the rateable value uplift attributable to the solar installation. Introduced to encourage rooftop solar adoption, this exemption means that adding solar panels to a commercial building does not increase the building's business rates bill, even though the installation adds value to the property.
Extended in the Spring Budget 2023 and currently confirmed until at least 2035, the business rates exemption provides significant ongoing value — particularly for larger installations where the rateable value uplift could otherwise be substantial.
For a 250kW solar array on a warehouse, the annual business rates saving from the exemption could be £3,000–£8,000 per year, adding £30,000–£80,000 in cumulative savings over the 10-year exemption period. Combined with capital allowances, the total tax and rates benefit can represent 30–35% of the gross installation cost.
Timing Your Investment
The timing of capital expenditure relative to your accounting year can significantly affect when you receive the tax benefit. The key principle is that capital allowances apply in the accounting period in which the expenditure is incurred — typically when the installation is complete and the asset is brought into use.
If your business is approaching a period end with profits to shelter, placing an order and completing an installation before the period end brings forward the tax saving by up to a full year. At current interest rates, a year's difference in the timing of a £75,000 Corporation Tax saving has a meaningful cash flow value.
Businesses facing potential corporation tax increases, or those with unusually high profits in a particular year, should pay particular attention to the timing of solar investment decisions. We can work with your accountant to help schedule installations around your reporting periods.
Combining Capital Allowances with Other Incentives
Capital allowances stack with other available incentives, multiplying the total financial benefit:
- Smart Export Guarantee (SEG): Export income from excess solar generation is taxable, but the tax is offset by the substantial electricity cost savings (which reduce taxable profits less than the SEG income adds).
- Thames Freeport enhanced capital allowances: Businesses within Thames Freeport tax sites can claim enhanced capital allowances on qualifying plant and machinery. Solar installations at Thurrock, London Gateway, and Tilbury qualify for these additional incentives until 2031.
- Freeport East incentives: Similarly, businesses at Freeport East sites including Gateway 14 in Stowmarket benefit from enhanced allowances on solar and battery installations.
- Workplace Charging Scheme: EV chargers installed alongside solar systems attract a separate £500 per socket grant (up to 40 sockets, £20,000 maximum), which does not reduce the qualifying expenditure for capital allowances purposes.
- VAT: Commercial solar installations are subject to VAT at the standard rate (20%), but VAT-registered businesses recover this as input tax, effectively removing VAT from the cost base for capital allowance purposes.
Practical Steps for Claiming
Claiming capital allowances on commercial solar is straightforward once you have the relevant documentation. Your solar installer should provide a detailed invoice breaking down the cost of each element — panels, inverters, mounting, electrical works — to support your tax return.
The claim is made on your Corporation Tax (CT600) return or self-assessment return via the capital allowances pages. Your accountant will handle the mechanics. The documentation you need to retain includes:
- Detailed installation invoice(s) showing itemised equipment and labour
- Equipment warranties and certificates (MCS certificate, DNO approval letter)
- Commissioning certificate showing the date the system was brought into use
- Bank statements showing payment
- Building/planning records if applicable
If you are purchasing a property with an existing solar installation, a fixtures election under s.198 Capital Allowances Act 2001 should be agreed with the seller to establish the qualifying value of the solar fixtures for your capital allowance claim.
The Complete Financial Picture
Capital allowances transform the financial case for commercial solar. Taking a 100kW system as a representative example:
100kW System — Total Financial Benefit (Year 1 and ongoing)
Gross installation cost
£85,000
AIA tax saving (25% rate)
-£21,250
Business rates saving (10 yr)
-£25,000 est.
Net effective cost
~£38,750
Annual electricity saving
£17,000–£22,000
Payback period (after relief)
Under 2.5 years
This example illustrates why capital allowances fundamentally change the investment conversation. The gross payback on a £85,000 100kW system might be 4–5 years. The after-tax payback for a corporation tax-paying business can be under 2.5 years, with 20+ years of free electricity thereafter.
For businesses evaluating commercial solar, the correct comparison is not the gross installation cost versus annual savings, but the net cost after tax relief versus after-tax savings. Working through these numbers with your accountant before deciding is strongly recommended — and is precisely the analysis we provide as part of our free site survey and ROI presentation.
To learn more about the full cost picture for commercial solar in Essex, Milton Keynes, and beyond, or to get a bespoke ROI calculation for your building, contact our team for a no-obligation site survey.
Frequently Asked Questions
Yes. Solar panels, inverters, battery storage systems, mounting equipment, EV chargers, and all associated installation costs qualify as plant and machinery for the Annual Investment Allowance (AIA). The AIA allows 100% of qualifying expenditure to be deducted from taxable profits in the year of purchase, up to a current limit of £1 million per year. A business buying a £200,000 solar system can deduct the full £200,000 from its taxable profits in year one.
Full Expensing, introduced in April 2023 and made permanent in the Autumn Statement 2023, allows companies subject to Corporation Tax to deduct 100% of qualifying plant and machinery expenditure in the year of purchase with no upper limit. Unlike the AIA (which has a £1 million annual cap), Full Expensing has no cap, making it particularly valuable for large-scale commercial solar installations over £1 million. Battery storage systems and EV chargers also qualify under Full Expensing.
The saving depends on your Corporation Tax rate. At the current main rate of 25%, a business investing £200,000 in solar panels saves £50,000 in Corporation Tax (25% of £200,000). At the 19% small profits rate (for businesses with profits under £50,000), the saving would be £38,000 on the same investment. The effective cost of a £200,000 solar system is therefore £150,000 for a main rate taxpayer — before any electricity savings are counted.
Qualifying expenditure includes: solar panels themselves, string and microinverters, battery storage systems, mounting structures (both roof-mounted and ground-mounted), DC and AC cabling, generation and export meters, monitoring systems, electrical connection work, scaffold hire specifically for installation, and the G98/G99 grid connection application fees. Structural roof reinforcement work may qualify separately under the Structures and Buildings Allowance. VAT on the purchase does not qualify unless you are VAT-registered and can recover it.
The position depends on who owns the solar system. If the landlord installs and owns the system, they can claim capital allowances against their rental income profits. If the tenant installs the system as a leasehold improvement, the tenant can claim allowances. Fixtures elections under s.198 CAA 2001 are relevant when selling a property with solar installed — both parties need to agree the apportionment of qualifying expenditure. We recommend taking specialist tax advice for landlord/tenant solar installations.
Yes, and it is highly valuable. Rooftop solar installations on commercial buildings are exempt from business rates for 10 years under the non-domestic rates exemption for solar energy. This exemption was extended in the 2023 Spring Budget and currently applies to new installations until at least 2035. The exemption applies to the rateable value uplift attributable to the solar installation, not the building's existing rates. The combination of capital allowances and the business rates exemption can be worth 30-35% of the total system cost in tax and rates savings.