Full Expensing vs Solar Grants 2026 | Why Tax Often Wins

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 — Full Expensing 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 Full Expensing actually does

Full Expensing was made permanent in the Autumn Statement 2023 by the previous government and confirmed by the current government in the 2024 fiscal events. It is a corporation tax allowance, not a grant. The mechanic is simple:

For any UK incorporated company paying corporation tax, qualifying capital expenditure on new plant and machinery — including solar PV — receives 100% first-year capital allowance. That means the entire capex amount 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.

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

What Annual Investment Allowance does

Annual Investment Allowance (AIA) is the related but distinct allowance covering the first £1m of plant and machinery capex per company per year. AIA gives 100% first-year capital allowance — same effect as Full Expensing — but applies to all qualifying companies, sole traders and partnerships (Full Expensing is corporation-tax-only).

For companies with capex above £1m per year, AIA covers the first £1m and Full Expensing covers the rest. The combined effect is straightforward: 100% first-year tax relief on most commercial solar plant.

The grant vs Full Expensing 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 Full Expensing 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: Full Expensing only

• No grant
• Full Expensing 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. There is no Full Expensing in the public sector (it’s tax-related). 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. Full Expensing alone caps at 25% (the corporation tax rate). 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. Full Expensing alone might not move the payback enough to clear the hurdle.

When Full Expensing wins clearly

Full Expensing 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. Full Expensing 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. Full Expensing alone is cleaner.

Companies with strong tax position. Full Expensing requires a corporation tax bill against which to set the allowance. Companies with strong taxable profits get full benefit; companies in 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 Full Expensing 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 + Full Expensing 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: Full Expensing 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

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 Full Expensing on net = £91,900 effective benefit
• Expected value (35% × £91,900) = £32,165
• Adjusted vs Full Expensing 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 Full Expensing 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: Full Expensing 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

Option 2: IETF + Full Expensing

• 8 weeks consultant work + 12 weeks DESNZ assessment
• Estimated success probability: 75% (strong scoring narrative)
• IETF grant if awarded: £550,000 (29.7% effective)
• Full Expensing on net: £325,000 (25% of £1.3m)
• Net cost if awarded: £975,000
• Expected value vs Full Expensing 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.

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, Full Expensing usually wins. Above £1m, grants become competitive. £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 — Full Expensing 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 Full Expensing 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 Full Expensing — 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 Full Expensing

Full Expensing is claimed on the corporation 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 “main pool” plant for capital allowances purposes
• Battery storage attached to PV is also Full Expensing eligible (recent HMRC clarification)
• Some integrated building items (e.g. roof remediation as part of solar install) may end up in the “special rate pool” rather than main pool — material for Full Expensing eligibility

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.

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.