AIA vs Solar Grants 2026 | Why Tax Relief Often Wins
Solar PV is special-rate plant, so Full Expensing does not apply — AIA gives 100% year-one relief, worth ~25% of capex.
Correction, updated 5 August 2026. An earlier version of this article presented Full Expensing (not available for solar) 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 most of them the AIA alone produces a better net cost than any grant route; the IETF closed in July 2025 and never funded solar. 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.
Is there a grant to compare against?
Not for most commercial solar projects today. The IETF closed to new applications in July 2025 with no successor, and it never funded solar PV. PSDS has had no open application window since Phase 4 closed in November 2024. REPF ended in March 2026. The Local Growth Fund is a settlement to the Mayoral Strategic Authorities, so whether any money reaches a solar project depends on that authority. For most companies the question is therefore not grant versus tax relief; it is how much tax relief a project earns and whether to buy the system or use a PPA.
What the AIA and the 50% first-year allowance are worth
Two worked examples, both for a profitable company paying 25% corporation tax. Solar is special-rate plant, so the Annual Investment Allowance (AIA) gives 100% relief on the first £1m a year, and spend above it gets the 50% special-rate first-year allowance with the balance written down at 6% a year.
- Small manufacturer, £450,000 of solar. The whole spend is inside the AIA: a £450,000 deduction is worth £112,500 of corporation tax in year one, so the net cost is £337,500 before electricity savings.
- Large manufacturer, £1,300,000 of solar. The AIA covers £1,000,000, worth £250,000 of tax. The remaining £300,000 gets the 50% first-year allowance: a £150,000 deduction worth £37,500 in year one, with the other £150,000 written down at 6% a year. Year-one relief is therefore £287,500, and the net cost after year one is £1,012,500.
These are year-one tax effects, not payback; savings from the electricity the system displaces and any export income come on top. Loss-making companies carry the relief forward instead of using it immediately.
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.
How to decide
The decision is project by project. The factors that matter most:
- Project size. Up to £1m the AIA covers everything. Above £1m the extra spend earns the 50% first-year allowance instead, so the relief per pound falls.
- Tax position. Loss-making companies do not get immediate benefit from the AIA; they carry it forward and lose the time value. A PPA may suit them better.
- Cash and balance sheet. An owned system needs the capital up front; a PPA needs none but gives away part of the savings.
- Time pressure. There is no application to wait for with tax relief; it is claimed on the return for the period the spend is incurred.
- Internal hurdle rates. Model the project on the AIA alone first. If it clears the hurdle, no other funding is needed.
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.