Solar Panels Capital Allowances

Solar panel capital allowances represent a huge boost to the ROI of most commercial solar and energy storage installations but lack of clarity and recent changes have left people confused. In this article, we will explain what capital allowances are, how you can claim them for solar and storage systems, how the amount is calculated and how you can claim it.

What are capital allowances?

Capital allowances are a legal way to reduce the amount of profit on which you pay tax. The assets that you buy, such as machinery and solar panels, can take a chunk out of the profit that you need to declare. This means your corporation tax bill is reduced, which saves you money.

Corporation tax is rated at 25% (gone are the days of 19%, boo), so the amount you save is 25% of the amount of the asset’s value that counts for profit reduction. Here is a simple example:

Your company has made £100,000 profit this year. You buy an asset (such as a machine) which is eligible for capital allowances, which costs £10,000. For this asset, you can use 50% of its value to write down your profit. Therefore, you can reduce your taxable profit by £5,000. You are basically saying that you have actually made only £95,000 profit now.

If 25% of your profits are taxed, you will save money on 25% of this profit reduction. As a result, buying this asset means you will reduce your corporation tax bill by £1,250. In other words, you can consider this asset to have cost you £8,750 instead of £10,000. That’s no small amount so it’s definitely worth knowing what to claim for!

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.

Let’s look at an example:

Your company will make £200,000 profit this year. You have already claimed for capital allowances on £50,000 of plant and machinery. Therefore, your new taxable profit is £150,000.

You decide to buy a solar PV system for £100,000. You have claimed much less than £1 million for capital allowances this year, 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 £50,000. The tax you pay on this will be 50,000 x 0.25 = £12,500. Without capital allowances, this would have been 200,000 x 0.25 = £50,000. So, capital allowances has saved you £37,500!

Special Rate Pool

If you have already claimed £1 million in capital allowances for the tax year, the 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, rated at 50%, followed by a special rate of 6% per year.

This means that you can use 50% of the total cost to reduce your taxable profit, and then 6% of its value in each subsequent year until the asset is written down to zero.

Here is an example:

Your company has already claimed for £1 million in capital allowances for the year. They decide to buy a solar PV system for £30,000. They are not eligible for AIA now, but they can still use the 50% first year allowance.

This means in the first year, the amount they can reduce their taxable profit by is 30,000 x 0.5 = £15,000. The tax saving is 15,000 x 0.25 = £3,750.

As they have only claimed for 50% of the asset so far, there is still £15,000 they can claim for in subsequent years until there is nothing left to claim for (the asset is written down). The rate they can claim it at is 6% for the second year onwards.

So, next year the amount they can reduce their taxable profit by is 15,000 x 0.06 = £900. The tax saving is 900 x 0.25 = £225.

The year after that, the asset has 15,000 – 900 left to claim, so the profit reduction is 14,100 x 0.06 = £846. The tax saving is 846 x 0.25 = £211.50.

This continues until there is nothing left to claim for. It can take well over 25 years for that to happen!

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 plants 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 self assessment form or partnership/company tax return, depending on how you trade. This should be completed by a qualified accountant as it is very important that the amounts are calculated correctly.

Please note: This information is designed for reference only. It has not been written by a qualified Accountant and should not be considered tax advice.