Solar tax relief in the UK — AIA, 0% VAT and special rate capital allowances.

Why solar tax relief matters more in 2026 than ever

For most of 2022-24, UK businesses had multiple parallel options to de-risk solar capex: IETF Phase 3 (manufacturing), PSDS Phase 4 (public sector), UKSPF (general SME), regional/devolved schemes, plus tax allowances. The grant menu was thick.

By May 2026, IETF, PSDS and UKSPF have all closed to new applications. Direct cash grants for new commercial solar projects are scarce — limited to REPF (rural), Local Growth Fund (11 Mayoral Authority areas), Salix loans (public sector), GBE Community Fund (community-led), and Scottish/Welsh/NI devolved equivalents. For everyone else, tax relief is the foundation.

The good news: UK solar tax relief is now the most generous it has been. The Annual Investment Allowance is permanently set at £1m of plant a year, 0% VAT was extended from domestic to commercial in subsequent budgets, and company spend above the AIA cap picks up the 50% special rate first-year allowance. Combined, these deliver approximately 40% effective subsidy on most UK commercial solar projects — equivalent to or better than what direct grants used to deliver after eligibility hurdles.

The three UK solar tax relief routes

Start here: all capital expenditure on the provision of solar panels has been designated special rate expenditure since April 2012 (HMRC Capital Allowances Manual CA22335). Full Expensing is a main-rate allowance, so it is not available on solar PV. The 100% year-one route for solar is the Annual Investment Allowance, which can be set against special rate expenditure. Why Full Expensing does not apply to solar.

Annual Investment Allowance (sole traders, partnerships, companies)

100% first-year capital allowance on the first £1m of qualifying plant per business per accounting period, including solar PV, and claimable against special rate expenditure. For a company paying main-rate CT (25%), saves 25p in tax per £1 of solar capex. For sole traders, saves at the marginal income tax rate (20-45% depending on overall income). No application; claimed on the next tax return. Full AIA guide.

50% special rate first-year allowance (companies, above the £1m AIA cap)

Where solar spend exceeds the £1m AIA cap in a period, or AIA is otherwise unavailable, a company can claim 50% of the excess in year one. The remaining balance goes into the special rate pool and is written down at 6% a year. At main-rate CT (25%) that is 12.5p of tax saved in year one on each £1 above the cap, with the rest relieved over subsequent periods.

0% VAT on commercial solar (any UK business)

Originally introduced for domestic solar in 2022, extended to commercial properties in subsequent budgets. Saves approximately 17% on the VAT-inclusive project cost. Applied at the invoice stage by the installer — no application required. Some installers default to 20% VAT on commercial — always ask explicitly for the 0% rate at quote stage.

Worked examples by entity type

UK incorporated company on £400k commercial solar

• Headline capex (ex-VAT): £400,000
• 0% VAT applied at install: saves £80,000 vs 20% VAT
• AIA tax saving (25% main rate CT): £100,000
• Effective net cost: £300,000 (assuming the £400k figure was already net of grants and was ex-VAT)
• Effective subsidy: 25% via AIA
• Combined cash impact: £180k of relief on a £400k headline (45% effective)

UK partnership farm on £180k REPF-funded solar

• Headline capex: £180,000
• REPF grant: £63,000 (35% effective)
• Net capex for AIA: £117,000
• AIA at 40% partner income tax: £46,800
• 0% VAT applied at install: ~17% off VAT-inclusive cost
• Effective net cost to partners: £70,200
• Effective subsidy: 61% combined

UK sole trader on £45k commercial solar

• Headline capex: £45,000
• AIA tax relief at 40% marginal income tax: £18,000
• 0% VAT applied at install: ~17% off VAT-inclusive cost
• Effective net cost: £27,000
• Effective subsidy: 40%

Asset register — what HMRC wants to see

HMRC expects a clean asset register breakdown showing solar plant separately from civils, professional fees and other lines. Specific items that should be on separate asset register lines:

• Solar PV modules (panels)
• Inverters
• Mounting structure
• DC infrastructure (cabling, isolators, combiners)
• AC infrastructure (cabling, switchgear)
• Battery storage (if included; eligible per HMRC 2023 clarification)
• Monitoring and metering
• DNO connection costs
• Design and project management fees (capital portion)
• Roof remediation (separate treatment)

We provide a template asset register to clients to make this clean. Most installers have their own template; we cross-check.

Timing the capex around the accounting period

The £1m AIA cap is per accounting period. For projects above £1m or for businesses with multiple capex priorities in the same period, sequencing the spend across a year-end can double the AIA available. Practical example: a £1.4m project commissioned in two phases (£900k pre-year-end, £500k post) gets AIA on £1m in year 1 and £400k in year 2 — full coverage.

What about second-hand solar plant?

AIA can cover second-hand plant in most circumstances, unlike the first-year allowances, which require plant that is new and unused. For solar specifically, all installations should use new Tier 1 modules — second-hand installations are rare in commercial UK solar in 2026 and not recommended.

Sale of the building or solar asset later

A disposal can trigger a balancing charge — broadly the lower of (sale price) or (the original allowance claimed) is brought back into taxable profits in the year of sale. For solar this rarely matters in practice; PV is sold as part of a building sale, where capital allowances transfer to the buyer.

Related

• Full Expensing on solar — why a main-rate allowance does not cover solar PV
• AIA on solar — the 100% year-one route, for every business type
• 0% VAT on commercial solar
• Full grants and funding hub
• UK government solar grants — every department's route