Capital Allowances on Solar Explained for Business 2026

Get the capital allowances right on a solar installation and you can knock five figures off the real cost of the project in year one. Get them wrong, and you either overstate your relief and plan around money you will not get, or you miss relief you were entitled to. It is the single most misreported area in business solar, so this guide sets out the correct position for 2026 and works through a real example.

The whole thing turns on one fact that most online advice gets wrong, so we will start there.

This is general information, not tax advice. Your own position depends on your company structure, profits and accounting period, so confirm the detail with your accountant before you rely on any relief.

The one fact that drives everything: solar is special-rate plant

Solar photovoltaic equipment is classed as special-rate plant and machinery for capital allowances. HMRC’s own manual confirms it. It sits in the special-rate pool, alongside things like electrical systems and integral building features, not in the main pool.

This single classification is the reason so much online advice is wrong, and it is the reason the reliefs work the way they do. Special-rate assets are treated differently from ordinary main-rate plant, and almost every mistake in the market comes from applying a main-rate rule to a special-rate asset. Hold on to “solar is special-rate” and the rest of this guide follows logically.

The relief that does apply: the Annual Investment Allowance

The good news is that solar qualifies comfortably for the Annual Investment Allowance, or AIA. The AIA gives a 100% first-year deduction on qualifying capital spend up to £1m per accounting period, and that £1m limit is permanent and unchanged into 2026.

For the great majority of business installs, this is the whole story. Most commercial solar systems cost well under £1m, so if your solar spend and any other qualifying capital expenditure in the year stay within the AIA limit, you deduct the full cost of the system from your taxable profits in year one. That is the same headline outcome people wrongly attribute to full expensing, reached through the correct route. The AIA is available to companies and unincorporated businesses alike, which makes it the primary relief for the typical buyer.

At a 25% corporation tax rate, a 100% first-year deduction is worth roughly 25p of tax saved for every £1 of qualifying spend, delivered as a reduction in your tax bill for that period.

The relief that does NOT apply: full expensing

Here is the mistake to avoid. You will constantly see solar sold on the promise of “100% full expensing”, and more recently the “40% first-year allowance” that succeeds it from January 2026. Both are real reliefs. Neither applies to solar.

Full expensing gives a 100% first-year deduction for main-rate plant only. The 40% first-year allowance that follows it is likewise a main-rate relief. Because solar is special-rate, it is specifically excluded from both. Anyone telling you a rooftop array qualifies for full expensing is quoting the wrong rule and, critically, overstating your first-year relief. If you plan a project around full expensing and then discover solar does not qualify, your first-year tax position is not what you budgeted for. This is not a minor technicality, it is the single most common and most costly error in the market, so it is worth being firm about: plan around the AIA, not full expensing.

Above the £1m cap: the 50% special-rate first-year allowance

Larger projects, or businesses that have already used their AIA on other assets, can spill over the £1m limit. Because solar is special-rate, a company subject to Corporation Tax can then claim the 50% special-rate first-year allowance on the excess, deducting half the remaining qualifying cost in year one. The remaining 50% goes into the special-rate pool and is written down at 6% a year on a reducing-balance basis.

Two conditions apply. The 50% allowance is for companies only, not unincorporated businesses, and it is for new and unused assets. It has no cap, which is why it mainly matters for spend above the £1m AIA ceiling. For most buyers, whose whole install fits inside the AIA, this allowance never comes into play, but for large or ground-mount projects it is the mechanism that relieves the excess.

The balance: the 6% writing-down allowance

Any solar spend not relieved by the AIA or the 50% first-year allowance is written down at 6% a year in the special-rate pool, on a reducing balance. This is slow, deliberately so, which is another reason the AIA matters: it front-loads the relief into year one rather than dribbling it out at 6% a year for decades.

One 2026 point worth knowing: the Autumn Budget 2025 cut the main-rate writing-down allowance from 18% to 14% from April 2026, but it left the special-rate 6% unchanged. So the recent WDA cut does not affect solar, because solar sits in the special-rate pool that was untouched.

Relief routes at a glance

Route	What it gives	Applies to solar?
Annual Investment Allowance	100% relief on up to £1m of spend	Yes, and covers most installs
Full expensing (100%)	100% first-year deduction, main-rate only	No, solar is special-rate
40% first-year allowance (from Jan 2026)	Main-rate first-year relief	No, solar is special-rate
50% special-rate first-year allowance	50% first-year deduction, companies only	Yes, on spend above the AIA cap
Writing-down allowance	6% a year, reducing balance	Yes, on any unrelieved balance

A worked example

Take a company buying a £48,000 rooftop solar system, the kind of figure a mid-size SME might spend on a 48 kWp array. Assume it is a profitable company paying 25% corporation tax, with plenty of headroom under its £1m AIA for the year, and that it is VAT-registered.

• The whole £48,000 sits comfortably inside the AIA, so the company deducts the full £48,000 from its taxable profits in year one.
• At 25% corporation tax, that 100% first-year deduction is worth roughly £12,000 in reduced tax (£48,000 × 25%).
• As a VAT-registered business, it reclaims the 20% input VAT through its normal VAT return, so the VAT is a cash-flow timing item rather than a real cost.
• The net cost of the system after year-one relief is therefore in the region of £36,000, before any energy savings even begin.

Now contrast that with the “full expensing” myth. If the company had planned around 100% full expensing, it would have expected the same £12,000 first-year benefit, and it would have got it, but only because the AIA happens to deliver the same outcome for spend under £1m. The danger appears at scale: a company spending £1.5m and relying on full expensing for the whole lot would find that solar does not qualify, that the AIA caps at £1m, and that the remaining £500,000 gets only the 50% first-year allowance plus 6% a year, not the 100% it budgeted for. That gap is exactly why the special-rate point matters. These are representative, indicative 2026 figures, not a named client.

Ownership decides who claims the allowances

There is a catch that ties capital allowances directly to your funding decision: only the owner of the asset can claim them. That has a big bearing on which finance route wins.

• Buy outright, a green loan, or hire purchase, and you own the asset, so the allowances are yours. Under hire purchase you count as the owner from day one for tax, so you claim the full year-one allowance even though you pay in instalments, which is one of the main reasons owners choose HP over a lease.
• An operating lease or a PPA, and the funder owns the asset, so the funder keeps the allowances, not you. On a Power Purchase Agreement that roughly £12,000 of first-year relief on a £48,000 system goes to the funder.

For a profitable company that can use its AIA in full, that difference can be decisive, and it is a strong argument for an ownership route over a funder-owned one. Our how to finance solar panels for your business guide walks through the routes with this in mind, and the finance options compared page lines them up on ownership and tax treatment side by side.

The other reliefs that go with the allowances

Capital allowances are the biggest lever, but two others complete the tax picture:

• VAT. Commercial solar is standard-rated at 20% VAT; the 0% domestic rate does not apply to business installs. A VAT-registered business reclaims that 20% through its normal VAT return, so for most firms it is a timing item, not a cost.
• Business rates. In England, qualifying rooftop solar for self-consumption is 100% exempt from business rates from 1 April 2022 to 31 March 2035, so it will not raise your rateable value in that window. Scotland and Wales run separate regimes.

Neither is a capital allowance, but both reduce the effective cost of owning the system.

Turning the tax position into a real number

Tax relief is one lever among several. The overall return on a commercial installation also depends on system cost, self-consumption rate, energy prices and how you fund the project. To see how the allowances feed through to a real figure, model your own numbers on the finance calculator, which shows the after-relief position, and read the cost and payback and ROI pages for the underlying ranges and drivers.

The headline to take away is simple: solar is special-rate, the Annual Investment Allowance gives 100% first-year relief on most installs, and 100% full expensing does not apply, so plan around the AIA and confirm your position with your accountant.

When you want firm, after-tax figures for your building, our partner installers and funders can return costed quotes that factor the reliefs in. If you would rather compare finance providers first, our sibling site for requesting costed commercial solar finance quotes does that, or you can request quotes from our partners when you are ready to move from theory to numbers.