What are the tax benefits of installing commercial solar panels?

Installing a commercial solar system saves you money on input energy costs – but it also offers several tax benefits and incentives. These tax allowances can give a huge boost to the ROI of your commercial solar installation. However, recent changes to the tax system and a lack of clarity have left people confused.

In this article, we will explain what capital allowances are, how you can claim them for solar systems, how the amount is calculated and how you can claim it.

What are capital allowances?

Capital allowances reduce the amount of profit on which you pay tax. The assets that you buy (plant & machinery), such as solar panels and their installation, give rise to allowances that reduce the profit that you need to declare – and so these save you money by reducing your corporation tax bill.

Corporation tax is rated at 25%, so the amount you potentially save through the tax benefits (in addition to lower energy costs) is 25% of the amount of the asset’s value. This is done by using capital allowances to reduce your tax bill. There is an example calculation below.

What capital allowances can I claim for solar panels?

Different assets that you buy have a different percentage that they can contribute to reducing your taxable profit. In the example above, this percentage is 50%, but for some items it’s 6% and some can be 100%. This is known as the rate pool, but here we will just call it the ‘rate’.

Whether solar panels’ capital allowances rate is 50% or 100% depends on how much you have already claimed in one year.

Annual Investment Allowance

The first £1,000,000 that you claim as capital allowances enjoys a 100% rate, under the annual investment allowance (AIA) for qualifying plant and machinery. This means that you can use 100% of the cost of the system to reduce your taxable profit. However, if you reach your £1 million limit for the year (altogether, not just for this system), your rate will be reduced.

Annual Investment Allowance (AIA) explained

Let’s look at an example:

• Your company will make £2,000,000 profit this year. You will claim for historical capital allowances brought forward amounting to £500,000. Therefore, your adjusted taxable profit is £1,500,000.

• You then decide to buy a solar PV system for £1,000,000 within your current financial year. You have not claimed for current year capital allowances prior to this investment, so you are still eligible for AIA. Therefore, 100% of that cost can be used to write back your taxable profit.

• Consequently, your new taxable profit will only be £500,000. The tax you pay on this will be £500,000 x 0.25 = £125,000. Without capital allowances, this would have been £2,000,000 x 0.25 = £500,000. So, capital allowances has saved you £375,000!

Special Rate Pool (First year Allowances)

If you have already claimed £1 million in capital allowances for the tax year, the full solar PV system will not be eligible for AIA. The standard rate pool is 18%.

…but don’t worry!

Solar PV systems and other plant and machinery, such as batteries and generators, are eligible for a First Year Allowance (FYA), rated at 50%, followed by a special rate of 6% per year after the first year.

This continues until there is nothing left to claim for, but It means you will get significant savings in year 1 and annual savings thereafter. And, as we’ve said before, this is on top of the lower energy costs that your solar installation will be delivering!

What about the other parts of the system?

This is where a lot of confusion arises. This is partly because, between April 2021 and March 2023, there was a higher rate, known as the super deduction tax, for qualifying energy saving plants and machinery, such as solar panels. This meant that, if you were buying solar panels and a generator, they would fall under different rates.

This is no longer the case. Now, anything related to a solar system (batteries, generators, inverters, etc) are all classed as plants and machinery, which all fall under either AIA or FYA and special pool rate, as discussed above.

Installation also counts for these rates, as long as it is invoiced as part of the rest of the system. This means that, if you hire one company to buy the asset and another company to install it, the installation is not eligible for these special capital allowances.

It should also be noted that plant and machinery such as these are only eligible if they are new. Used goods do not count.

How can I claim solar panel capital allowances?

You should declare your capital allowances on your company tax return. This should be completed by a qualified accountant as it is very important that the amounts are calculated correctly.

Any other benefits?

In addition to the above, your solar installation may give access to Business Rates Relief and even R&D tax credits. But, most importantly, a well-designed solar array will give you significantly lower energy costs for at least 25 years and also help your carbon reduction and your business’s sustainability credentials. What’s not to like?!

Please note: This information is designed for reference only. It should not be considered tax advice.

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