AIA vs Solar Grants 2026 | Why Tax Relief Often Wins

Correction, updated 5 August 2026. An earlier version of this article presented Full Expensing as the capital allowance route for commercial solar. That was wrong, and we have corrected it throughout. Under HMRC’s Capital Allowances Manual (CA22335), all capital expenditure on the provision of solar panels has been designated special rate expenditure since 1 April 2012 for corporation tax (6 April 2012 for income tax). Full Expensing is a main-rate first-year allowance, so it does not apply to solar PV. The correct route to 100% relief in year one is the Annual Investment Allowance (AIA). Crucially, the numbers in this article are unchanged: 100% relief at 25% corporation tax is still worth roughly 25p in the pound, so every net cost, saving and payback figure below still stands. Only the name and mechanics of the allowance have been corrected.

Most UK businesses thinking about commercial solar start by asking about grants. The honest answer is that for many of them — including many that would qualify for IETF or REPF — the Annual Investment Allowance (AIA) alone produces a better net cost than the equivalent grant route. This piece walks through the maths, when each route wins, and why the assumption that “grants are better than tax allowances” is wrong more often than people realise.

What the Annual Investment Allowance actually does

AIA is a capital allowance, not a grant. The mechanic is simple:

For any UK business investing in qualifying plant and machinery — including solar PV — the Annual Investment Allowance gives a 100% deduction on the first £1,000,000 of qualifying capex per year. That means the entire capex amount (up to the £1m annual limit) is deducted from taxable profits in the year the spend is incurred.

For a company paying main-rate corporation tax (currently 25%), this is equivalent to a 25p reduction in tax for every £1 of qualifying capex. So a £400,000 solar system effectively costs the company £300,000 net of tax.

AIA is also broader in who can claim it than the main-rate first-year allowances: it is available to companies, sole traders and partnerships alike.

Mechanically simpler than a grant. No application. No competitive scoring. No risk of rejection. Claimed on the tax return for the period in which capex is incurred.

Why Full Expensing does not apply to solar

This is the single most common error in commercial solar funding advice, and it is worth being blunt about it.

Full Expensing — the permanent 100% first-year allowance introduced at the Autumn Statement 2023 — applies to main-rate plant and machinery only. Solar panels are not main-rate plant. HMRC’s Capital Allowances Manual at CA22335 states that with effect from 1 April 2012 (corporation tax) and 6 April 2012 (income tax), all capital expenditure on the provision of solar panels is specifically designated special rate expenditure.

Special rate expenditure is excluded from Full Expensing. It is not excluded from AIA — and that is the point. AIA is available against special rate expenditure, which is exactly why AIA, not Full Expensing, is the route to 100% year-one relief on a solar project.

What happens above the AIA limit:

• Up to £1m of qualifying capex per year: AIA gives 100% relief in year one.
• Above the £1m AIA cap (or where AIA is unavailable): companies can claim the 50% special-rate first-year allowance in year one, with the balance going into the special rate pool, which attracts a 6% writing-down allowance thereafter.

The practical consequence: most commercial solar projects sit comfortably under £1m, so AIA delivers full year-one relief and the headline “25% of capex back” holds. On larger schemes the total relief is the same over time, but the timing stretches out.

The grant vs AIA comparison

Take a £500,000 commercial solar project for a UK manufacturing company paying 25% corporation tax.

Route A: IETF Phase 3 grant

• Grant intensity: 25% (typical effective rate after eligible-vs-total calculations)
• Grant amount: £125,000
• Net of grant: £375,000
• Then AIA on £375,000: £93,750 tax saving
• Net cost to client: £281,250
• Application overhead: 8 weeks of consultant work + 12 weeks of DESNZ assessment
• Application risk: ~30% chance of rejection on first attempt

Route B: AIA only

• No grant
• AIA on £500,000: £125,000 tax saving
• Net cost to client: £375,000
• Application overhead: zero (claimed on tax return)
• Application risk: zero

The grant route saves £93,750 more on net cost than the tax-only route. That’s 18.75% of headline capex — clearly material. So why does the tax-only route win for many businesses?

Three reasons:

Time. The grant route adds 5 to 6 months to the project timeline. The application takes 8 weeks; DESNZ assessment takes 12 weeks; you need to wait for the next window if you missed the current one. For projects where the value of starting now is high — energy prices rising, capex inflation, internal capital allocation deadlines — that delay can erase the £93,750 advantage.

Risk. A 30% chance of grant rejection means an expected loss of 30% × £125,000 = £37,500 in unrealised grant value. Adjusting for risk, the grant route’s expected net cost rises to £318,750, narrowing the gap.

Application cost. A typical IETF application has £6,500 to £8,500 of consultant fees plus internal staff time. That’s not free.

After adjusting for time, risk and application cost, the actual NPV gap between grant and tax-only routes for a £500,000 project is closer to £40,000 — material but not transformative.

When grants win clearly

Grants win clearly in three scenarios:

Public sector. PSDS funds 100% of capex for eligible public sector applicants. Capital allowances such as AIA are tax reliefs, so they are of no use to a body with no corporation tax bill. The grant is the only meaningful funding mechanism.

Large projects. For projects above £1m of capex, IETF effective grant rates can reach 28–32% on bundled measures with strong carbon scoring. Capital allowances alone cap the benefit at 25% (the corporation tax rate) — and because solar is special rate expenditure, only the first £1m attracts AIA, with the excess falling to the 50% special-rate first-year allowance and the 6% pool. So on larger schemes the relief is both capped in size and slower to arrive. On a £2m project, that’s a £140k+ advantage to the grant route.

Projects that need the grant to clear an internal hurdle. If a 7-year payback project becomes a 4.5-year payback project with a grant, and your internal hurdle is 5 years, the grant unlocks the project. Capital allowances alone might not move the payback enough to clear the hurdle.

When the AIA route wins clearly

AIA wins clearly in four scenarios:

Speed-critical projects. Where the value of starting now is high — typically because energy prices are expected to rise, supplier capacity is constrained, or internal capital allocation deadlines apply — the 5–6 month grant delay is too expensive.

Below IETF eligibility thresholds. If your business doesn’t qualify for IETF (most service-economy businesses, smaller manufacturers, retail, hospitality), the grant route doesn’t exist for you anyway. AIA is the funding mechanism.

Smaller projects (£100k to £500k). Application overhead and grant risk are the same regardless of project size. On a £200k project the absolute grant amount is too small to justify the application cost and risk. AIA alone is cleaner — and at that size the whole project sits inside the £1m annual allowance, so you get 100% of the relief in year one.

Companies with strong tax position. AIA requires taxable profits against which to set the allowance. Companies with strong taxable profits get full benefit; companies in a loss-making position can carry the allowance forward but lose the time value.

The PPA wildcard

A third option deserves mention. A Power Purchase Agreement is neither a grant nor a tax allowance — it is a private finance route. The PPA funder pays for and owns the solar; you sign a long-term contract to buy power at a fixed pence/kWh.

For most commercial sites in 2026, a competitive PPA tariff sits 6–9p/kWh below grid prices. Over a 25-year contract, the cumulative savings are substantial — and there is zero capex.

The PPA economics are not directly comparable to grant or AIA routes because the timing and capital structure are different. A simple way to think about it: a PPA gives you most of the savings without the capital. A grant plus AIA gives you all the savings but requires the capital. For sites with weak balance sheets or capital allocation pressure, PPAs win on a net basis. For sites with cash to invest, owned assets win on a 25-year horizon.

Worked example: a small manufacturer

Acme Plastics is a UK-incorporated injection moulding company with annual electricity demand of 1.4 GWh, paying 25% corporation tax. It is considering a 280 kWp rooftop PV system at £210,000 capex.

Acme’s profile is below the typical IETF threshold (the energy intensity test isn’t comfortably met). The IETF route is theoretically available but realistically marginal.

Option 1: AIA alone

• Capex: £210,000
• Tax saving: £52,500 (25% of £210,000)
• Net cost: £157,500
• Annual savings: £42,000
• Net payback: 3.75 years
• Project starts: this quarter

At £210,000 the whole project sits well inside the £1m AIA limit, so 100% of the relief lands in year one despite solar being special rate expenditure.

Option 2: Apply to IETF with marginal eligibility

• 8 weeks consultant work + 12 weeks DESNZ assessment
• Estimated success probability: 35%
• If awarded: £52,500 grant + £39,400 AIA on net = £91,900 effective benefit
• Expected value (35% × £91,900) = £32,165
• Adjusted vs AIA alone: -£20,335 (worse)
• Risk of project not happening if grant rejected: low, but it adds a 5-month delay

For Acme, the right answer is clearly AIA alone. The grant route’s expected value is lower, with substantial delay and project-management overhead.

Worked example: a large manufacturer

Beta Industries is a UK-incorporated metal forging operation with annual electricity demand of 8.6 GWh. It is considering a 1.4 MWp rooftop PV system plus 250 kWh battery storage and a heat pump retrofit, total capex £1.85m.

Beta’s profile is comfortably above IETF eligibility. The integrated package scores well on carbon savings per pound.

Option 1: Capital allowances alone

• Capex: £1,850,000
• Tax saving: £462,500 (25% of £1.85m)
• Net cost: £1,387,500
• Annual savings: £298,000
• Net payback: 4.66 years

Timing note: at £1.85m Beta is over the £1m AIA cap. The first £1m attracts AIA at 100% in year one; the balance attracts the 50% special-rate first-year allowance, with the remainder entering the 6% special rate pool. The total relief is still the £462,500 shown above — it simply does not all arrive in year one, which slightly weakens the tax-only route on an NPV basis.

Option 2: IETF + capital allowances

• 8 weeks consultant work + 12 weeks DESNZ assessment
• Estimated success probability: 75% (strong scoring narrative)
• IETF grant if awarded: £550,000 (29.7% effective)
• Capital allowances on net: £325,000 (25% of £1.3m)
• Net cost if awarded: £975,000
• Expected value vs capital allowances alone: ~£302,000 of additional benefit, even after adjusting for application cost and risk

For Beta, the IETF route wins clearly. The £302,000 expected additional benefit substantially exceeds the application overhead and delay cost — and the grant reduces net capex below the £1m AIA cap, so more of the remaining relief lands in year one.

How to decide

The decision is not “grants vs tax allowances” in the abstract. It is project-by-project. The factors that matter most:

1. Project size. Below £500k, AIA usually wins. Above £1m, grants become competitive — partly because that is exactly where the AIA cap starts to bite. £500k to £1m is the most variable zone.

2. Sector eligibility. If you’re not in an IETF-eligible sector and not in the public sector, the question is moot — AIA is the route.

3. Time pressure. If you need to start within 8 weeks, the grant route is too slow.

4. Internal hurdle rates. If your project clears your internal hurdle on AIA alone, the marginal benefit of pursuing a grant may not justify the cost and risk.

5. Tax position. Loss-making companies don’t get immediate benefit from AIA — they carry forward, losing the time value.

We model both routes side by side for every client. The right answer is whichever route gives the highest risk-adjusted NPV.

Practical mechanics of claiming AIA on solar

AIA is claimed on the tax return for the period in which the capex is incurred. The HMRC mechanics:

• Capex must hit the asset register before period end (timing matters for Year 1 relief)
• Detailed capex breakdown needed — separate solar plant from civils, fees and ineligible items
• Solar PV is special rate plant, not main pool plant (HMRC Capital Allowances Manual CA22335). This is why Full Expensing is not available on it, and why AIA — which is available against special rate expenditure — is the route to 100% year-one relief
• Spend above the £1m annual AIA limit does not disappear: it attracts the 50% special-rate first-year allowance, with the balance written down at 6% a year in the special rate pool
• Battery storage installed alongside the array should be assessed on its own facts rather than assumed to follow the panels — confirm the correct pool and allowance with your tax adviser before modelling year-one relief on it
• Structural and building-fabric items (for example roof remediation carried out as part of a solar install) may not qualify as plant at all — material for how much of the total spend actually attracts allowances

If you’re considering a solar project, talking to your accountant or tax adviser early is worth doing. The split between eligible and ineligible items can affect 5–8% of net cost. Nothing on this page is tax advice — it is a description of the allowances as HMRC currently sets them out.

How to start

The fastest way to scope your specific situation is the free funding review. Tell us your annual electricity spend, sector and rough capex, and we will model both grant and tax-only routes side by side.