Solar panel depreciation: how UK accounts treat a solar system, and why it does not set the tax bill

Solar panel depreciation: the short answer

Solar panel depreciation is the accounting charge that spreads the cost of a business's solar system over the years it is used. It comes from the accounting standard the business reports under and rests on management's own estimates: how long the system will be useful, what it will be worth at the end, and the pattern in which its benefits are used up. It does not decide the tax bill. For tax, the depreciation is added back and capital allowances are claimed instead, which for solar usually means the Annual Investment Allowance in the period of purchase. The gap in timing between the two is what deferred tax accounting deals with. This guide covers FRS 102 and, for micro-entities, FRS 105, and takes each step in turn: what goes into the cost, choosing a useful life, splitting the system into components, residual value and method, impairment, the tax position, deferred tax, leased systems from 2026 and the simpler micro-entity rules.

What goes into the cost

A purchased system is an item of property, plant and equipment. Under FRS 102 its cost has three parts. The first is the price paid, net of trade discounts and rebates, plus any purchase taxes the business cannot recover. The second is the cost of getting the system into place and into working order as management intends; the standard's examples include preparing the site, delivery and handling, installing and assembling it, and testing that it works. The third, where the business takes on an obligation to take the system out and put the site right, is an initial estimate of that cost, measured under Section 21.

Three practical points follow for solar. VAT the business can reclaim is not a non-refundable tax, so it stays out of the cost. If the system sits on a leased roof, or on land the business must clear at the end of an agreement, the estimated cost of removing it and making good can belong in the asset's cost. And routine running costs stay out: FRS 102 sends the cost of day-to-day servicing to profit or loss as it is incurred. After recognition, a business using the cost model carries the system at cost less accumulated depreciation and accumulated impairment losses; FRS 102 also allows a revaluation model, but a business that chooses it must apply it to all items in the same class of asset.

Choosing a useful life

FRS 102 does not prescribe a useful life for solar panels, or for any other asset. Its definition is the period for which the business expects the asset to be available for use, or the output it expects to get from it, and it requires the depreciable amount, which is cost less residual value, to be spread on a systematic basis over that life. The estimate is the business's own, and the standard lists what it has to weigh: how much the asset is expected to be used, judged by its expected capacity or output; the physical wear and tear expected, which depends on how it is run and maintained; the risk of it becoming technically or commercially obsolete; and any legal or similar limit on its use, such as the date a related lease expires.

For solar, the last factor is often the one that decides it. A system on a roof the business leases, or one installed under an agreement that ends on a fixed date, may have to come off when that agreement ends, and the date can cap the useful life whatever the panels could physically manage. Warranties are a separate matter. A product or performance warranty is a manufacturer's promise about defects or output; it is evidence the business can weigh, but it is not a useful life. Nor is the tax rule. The 25-year test in the capital allowances rules is the definition of a long-life asset, an item with a useful life of at least 25 years from new, and HMRC designates solar panels as special rate expenditure regardless of their life. Neither the warranty nor the tax test sets the accounting life.

Components: panels, inverters and batteries

FRS 102 requires a business to allocate the initial cost of an asset to its major components where those components have significantly different patterns of consumption of economic benefits, and to depreciate each component separately over its own useful life. A solar system is a natural candidate, because it is made of parts that may wear out at different rates: the panels and their mounting, the inverters and any battery. Whether a difference is significant enough to need separate components is a judgement for the business and its auditor; FRS 102 is a general standard and does not list solar components or their lives.

The same section deals with replacements. Where part of an item needs replacing, the business adds the cost of the replacement part to the carrying amount of the asset when the cost is incurred, if the part is expected to provide incremental future economic benefits, and derecognises the carrying amount of the part replaced, whether or not that part was depreciated separately. A business that expects to replace inverters part-way through the life of the panels therefore has a reason to identify them as a separate component from the start, so that the replacement is accounted for cleanly.

Residual value, depreciation method and when to start

Depreciation is charged on the depreciable amount, so the residual value matters. In FRS 102, residual value is what the business estimates it would get today, net of the costs of disposal, for the asset if it were already as old, and in the condition, it is expected to be in at the end of its useful life. For a system that will cost money to remove, that figure may be small. The method has to follow the pattern in which the business expects to use up the asset's benefits; the methods FRS 102 mentions are straight-line, diminishing balance, and usage-based methods such as units of production. Depreciation starts when the asset is available for use, meaning it is in place and in a condition to operate as management intends; in practice that is usually when a system is commissioned, not when the invoice is paid.

None of these estimates is fixed for good. FRS 102 gives examples of signs that the residual value or useful life may have moved since the last annual reporting date: a change in the way the asset is used, wear and tear that is both significant and unexpected, technological advances, and shifts in market prices. When signs like these appear, the business looks again at its estimates and, if its expectations have changed, revises the residual value, method or life, treating the revision as a change in accounting estimate.

Impairment

FRS 102 points to Section 27, Impairment of Assets, both for deciding whether a solar system is impaired and for recognising and measuring any loss. Section 27 sets out when the carrying amount is reviewed, how the recoverable amount is found, and when a loss is recognised or reversed. For a solar system, the events a business might check against include physical damage, output falling well short of what was expected, or a change in how the building is used that reduces the value of the electricity generated. Compensation from a third party, such as an insurer, for an asset that was impaired, lost or given up goes to profit or loss only when the compensation is virtually certain.

Why depreciation does not set the tax bill

The depreciation charge reduces accounting profit, but it is not a tax deduction. HMRC's policy paper on the 2026 capital allowances changes says it directly: capital allowances take the place of commercial depreciation, which is not allowed for tax. In the tax computation the depreciation is added back and the business claims capital allowances on the cost instead. HMRC designates all capital expenditure on solar panels as special rate, so the allowances available are the Annual Investment Allowance, which lets a business deduct the full value of qualifying items from its profits before tax up to the £1 million AIA amount; for companies, a 50% first-year allowance on new special rate plant above that, with the balance added to the special rate pool in the following accounting period; and writing-down allowances of 6% a year in the special rate pool. Whatever life the accounts use, none of those numbers changes. The full map of reliefs, including who claims under each finance route, is in the guide to solar panel tax relief, and the allowances themselves are set out in the capital allowances guide.

Deferred tax when allowances run ahead of depreciation

Because the AIA can relieve a whole system in the period of purchase while the accounts spread its cost over many years, the tax relief runs ahead of the depreciation. FRS 102 Section 29 deals with that gap. Deferred tax is recognised on all timing differences at the reporting date, subject to listed exceptions. A timing difference is a gap between taxable profit and total comprehensive income that arises because an item of income or expense is taxed in a different period from the one in which the accounts recognise it. The liability is measured using the tax rates and laws expected to apply when the difference reverses, as enacted or substantively enacted at the reporting date.

The example below shows the mechanics. It is illustrative only: the 20-year life is an assumption chosen to make the arithmetic easy to follow, not a recommended or typical life. The inputs are a company that buys a system for £120,000, claims the AIA on the full cost in year one, depreciates the system on a straight-line basis over an assumed 20 years with no residual value, and pays and expects to pay corporation tax at the 25% main rate.

Line	Year 1	Each of years 2 to 20
Depreciation in the accounts	£6,000 (£120,000 ÷ 20)	£6,000
Capital allowances claimed	£120,000 (AIA)	Nil
Timing difference created or reversed	£114,000 created (£120,000 less £6,000)	£6,000 reversed
Deferred tax at 25%	Liability of £28,500 recognised	Liability falls by £1,500

Leaving aside the energy savings the system produces, in year one the company's current tax falls by £30,000, which is 25% of the £120,000 allowance, while its accounting profit falls by only the £6,000 of depreciation. The deferred tax charge of £28,500 brings the total tax charge in the accounts back into line with the accounting profit: £30,000 less £28,500 leaves £1,500, which is 25% of the £6,000 depreciation. Over the next 19 years the liability unwinds at £1,500 a year, which adds up to the £28,500, as depreciation continues with no further allowances against it. The cash benefit of the AIA is real and arrives early; deferred tax changes how the accounts present it, not the tax actually paid.

Leased systems on the balance sheet from 2026

The 2024 amendments to FRS 102 replace the previous version for accounting periods beginning on or after 1 January 2026. HMRC's leasing manual summarises the change for lessees: the distinction between on-balance-sheet finance leases and off-balance-sheet operating leases is removed, a lessee recognises all leases on its balance sheet except certain exempted leases, and it records a right-of-use asset and a lease liability, depreciating the right-of-use asset over the life of the lease. A business that leases a solar system will therefore usually show a depreciating asset and a liability, rather than a simple rental expense, from its first period beginning on or after 1 January 2026. FRS 102 lets a lessee choose not to apply those requirements to short-term leases, which are leases with a term of 12 months or less and no purchase option, and to leases of low-value assets.

The tax analysis is meant to stay where it was. HMRC says Schedule 14 to the Finance Act 2019 aimed to ensure that new or revised accounting standards did not change the tax treatment of lessees, and that the same basic principles remain, such as most rentals being on revenue account despite the on-balance-sheet accounting. Whether a power purchase agreement or an energy-as-a-service contract contains a lease at all is a separate question, covered in whether energy as a service goes on the balance sheet. For the lease route itself, see the operating lease guide.

Micro-entities on FRS 105

Micro-entities applying FRS 105, the Financial Reporting Standard applicable to the Micro-entities Regime, follow simpler rules. Property, plant and equipment is measured after initial recognition at cost less accumulated depreciation and accumulated impairment losses, and the standard has its own component rule for major parts with significantly different patterns of consumption. A micro-entity does not recognise deferred tax, so the timing difference in the example above never appears in its accounts. The 2026 lease changes do not reach FRS 105 either: leases are still classified as finance or operating leases by their substance, and operating lease payments are expensed over the lease term, normally on a straight-line basis. The tax side is the same as for any other company: depreciation is added back and capital allowances are claimed.

Before you rely on any of this

This article is general information about UK accounting and tax rules as they stand on 14 October 2026, not accounting or tax advice. Useful lives, components and residual values are judgements that depend on the particular system, the building and the contracts around it, so agree them with your accountant or auditor, and check the tax position with an accountant or HMRC. For how the cost of a system compares with what it saves, see payback and return on investment.

Questions business owners ask

How do you depreciate solar panels in UK accounts?

Under FRS 102 a purchased system is property, plant and equipment. Its cost, including installation and any estimated removal and restoration obligation, less its residual value, is spread on a systematic basis over the useful life the business estimates, using a method that follows how the benefits are used up, such as straight-line. Depreciation starts when the system is available for use.

What useful life should I use for solar panels?

FRS 102 sets none. The business estimates the life from expected usage, physical wear and tear, technical or commercial obsolescence and legal limits such as the expiry of a related lease. A warranty is evidence to weigh, not a useful life, and the 25-year tax definition of a long-life asset does not set the accounting life.

Can I deduct solar panel depreciation from tax?

No. Depreciation is not allowed for tax; capital allowances take its place. For solar panels, which HMRC designates as special rate, that usually means the Annual Investment Allowance up to £1 million, then for companies a 50% first-year allowance on new plant, then 6% a year in the special rate pool.

Should inverters be depreciated separately?

If they have a significantly different pattern of consumption from the panels, FRS 102 requires the cost to be split into major components, each depreciated over its own life. Whether the difference is significant is a judgement for the business and its auditor. A replacement part is added to the carrying amount and the replaced part is derecognised.

Does deferred tax apply to solar panels?

Under FRS 102 it usually arises when capital allowances run ahead of depreciation, because deferred tax is recognised on timing differences and measured at tax rates enacted or substantively enacted by the reporting date. Micro-entities applying FRS 105 do not recognise deferred tax.

Are leased solar panels on the balance sheet?

Under FRS 102, for periods beginning on or after 1 January 2026, most leases put a right-of-use asset and a lease liability on the lessee's balance sheet, with optional exemptions for short-term and low-value leases. FRS 105 keeps the operating lease model. HMRC says the tax rules aimed to leave lessees' tax treatment unchanged.