Tax Incentives for Solar Installation in the UK

Due to rising energy costs, increasing numbers of UK homeowners are “going solar”. Around 1.3 million properties use them, with numbers increasing daily. Although installations can be costly, tax incentives under the EU’s Renewable Energy Directive aim to reduce costs, making solar panels more accessible.

Tax Incentives for Residential Solar Panel Installations

While setting up solar power systems can be pricey, costing an average of £9,100 (without installation), 0% VAT on solar panels and batteries ease the upfront costs.

VAT incentives on solar panels

The UK places a Value-Added-Tax (VAT) of around 20% on most products and services. However, due to the UK government’s efforts to encourage sustainable energy use, energy-saving materials (ESMs) receive tax breaks.

Solar panels are one of the most common types of ESMs and are exempt from VAT. However, this is only applicable to residential solar panel installations.

Additionally, you’ll need to keep in mind that this incentive is set to expire in 2027, following a five-year cost reduction introduced in 2022. After this date, ESMs will revert to the 5% VAT rate.

How much can you save with a VAT reduction?

A 0% VAT could dramatically lower your final cost. For instance, installing a 4 kW system, priced at £10,000 under the usual 20% VAT, would result in a total price of £12,000. Average savings for three-bedroom homes range from £393 to £900.

Who is eligible for a VAT reduction?

Only residential properties in the UK are eligible for this incentive and do not have to pay VAT on solar panels. This tax reduction covers the products and is not implemented based on the purchaser.

How to apply for a VAT reduction?

This incentive is automatically applied by your solar panel provider.

Tax Incentives For Commercial Solar Panel Installations

Businesses cannot make use of the 0% VAT incentives and are subject to the standard 20% VAT. However, other tax incentives are available for commercial properties looking to harness solar energy:

• Annual Investment Allowance (AIA)
• Renewable energy generation relief
• Full expensing

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is a form of capital investment allowance. It allows businesses to reclaim tax relief on essential assets, including energy equipment such as solar panels.

Essentially, businesses can deduct up to 100% of the solar panel installation costs before taxes on profit are calculated.

How much can you save with AIA?

Here’s an example to see how much your commercial property could save on installing a solar system:

• Let’s assume that the total price of solar panels is £100,000 for a building.
• Deduct 100% of the installation costs, which is £100,000.
• Factor in the corporate tax rate of 25%.
• In this example, you could save £75,000 on your solar panel installation.

While you would not get 100% free solar panels under this incentive, you could save on over half of the upfront costs.

Who is eligible for AIA?

Any business that pays the corporation tax can claim the AIA incentive, as long as they legally install solar panels for their own use.

However, your business won’t be eligible for the AIA incentive:

• If you used the solar panels for non-business purposes. For example, if you install second-hand solar panels on your business that were previously installed on your house.
• If the solar panels were gifted to your business, instead of purchased.

If your business is not eligible for this incentive, there are others you could look into, such as the 50% First Year Allowance (FYA) or 130% Super Deduction.

How to apply for AIA?

Businesses should claim their AIA through their annual Company Tax Return. However, there are a couple of things to keep in mind before you make the claim:

• The claim should be submitted within the accounting period that they purchase their solar panels.
• If the payment is due within 4 months of signing the contract, the submission date should be within the accounting period of the date of signing.
• If the payment is due more than 4 months after signing the contract, the submission date should be within the accounting period of the payment due date.

Renewable Energy Generation Relief

The Renewable Energy Generation Relief scheme is a non-domestic relief initiative available in Scottland. Properties held by private, public, and third sectors may be charged with non-domestic rates. However, those in Scottland can make use of non-domestic reliefs to lower their tax costs.

The Renewable Energy Generation Relief scheme aims to reduce taxes for properties that produce power or heat using renewable energy sources and operate renewable energy projects that benefit community organisations.

Note: This reduction is only applicable to the non-domestic rates themselves, and will not directly reduce a property’s rent or energy bills.

How much can you save with Renewable Energy Generation Relief?

How much relief you’ll be eligible for will be calculated based on your property’s rateable value. However, here’s a basic idea of the relief you could acquire:

• Up to 100% relief (no payable rates) for properties with a rateable value up to £145,000.
• Up to 50% relief for properties valued between £145,000 and £430,000
• Up to 25% relief for properties valued between £430,000 and £860,000.
• Up to 10% relief for properties valued between £860,000 and £4 million.
• Up to 2.5% relief for properties valued above £4 million.

Who is eligible for Renewable Energy Generation Relief?

Businesses are eligible for Renewable Energy Generation Relief under two circumstances:

• They operate a sustainable energy scheme that entitles 1+ community organisations to 15% of their annual profit.
• They operate a sustainable energy scheme that entitles 1+ community organisations to an amount of annual profit equivalent to 0.5 megawatts of the total installed project capacity.

In other words, this relief is for organisations that can give back to the community within the renewable energy sector.

To be eligible for this relief, one of these sources must be used for energy production:

• Biomass
• Biofuels
• Fuel cells
• Photovoltaics
• Water
• Wind
• Solar panel
• Geothermal sources

Additionally, the property will be assessed for eligibility. Mainly, it must be located in Scotland and energy generation should be the main purpose of the property.

How to apply for Renewable Energy Generation Relief?

How you apply will depend on where your property or business is located. Check with your local authorities for more specific application procedures and requirements.

Full expensing

Full expensing is a tax relief measure that replaced the UK Super-Deduction capital allowance, which expired in 2023. This relief is set to expire on March 31, 2026.

It allows companies to claim a 100% tax deduction, provided that they make qualifying capital investments in the year of spend. This tax relief aims to offset the increased main rate of corporation tax and has the potential to offer significant savings.

While this relief is not directly related to installing solar panel systems or any other renewable energy systems, it can be used for solar system investments. However, you will need to meet the qualifying criteria outlined in the legislation.

How much can you save with full expensing?

Businesses can redeem up to £250 for every £1,000 spent on eligible capital investments against their tax year, in the year they are acquired.

Solar panels would fall under the category of plant and machinery for energy generation purposes. If the system meets the criteria, investors could benefit from a 100% first-year capital allowance under full expensing.

Additionally, air conditioning, heating systems, lighting, and electrical systems could receive a 50% relief. Now, considering that a solar panel system could provide lighting, electricity, and heating, owners could see anywhere between a 50% or 100% expensing on their investments.

Who is eligible for the full expensing?

Only new and unused investments are eligible for this benefit, unlike under the Super-Deduction.

Some other eligibility criteria include:

• The investments should be purchased by the organisation, and should not have been received free of charge (i.e. as a gift).
• The investments should not be bought to be leased to another person or organisation.
• The expenditure must have been incurred either on or after April 1 2023.
• The company must be subjected to the 25% corporation tax.

If you are eligible for this tax relief measure, your returns for investments must be made during the same accounting period.

How to apply for the full expensing?

Corporations must ensure their investments meet the criteria for new, previously unowned assets, purchased before the incentive’s expiration date of March 31, 2026. We recommend consulting with tax advisors to optimise tax planning and check if your assets comply with the relief’s requirements.

FAQs

Are there other solar panel initiatives?

Yes, there are plenty of other initiatives and solar panel grants and initiatives that you could benefit from in the UK.

These include:

• Energy Company Obligation 4 (ECO 4) scheme
• The Smart Export Guarantee (SEG)
• Home Upgrade Grant
• Public Sector Decarbonisation Scheme

What documents do I need to claim tax incentives for my solar panels in the UK?

There are two main documents you might need to claim your solar tax returns:

1. For residential solar panel owners (0% VAT): A VAT invoice that clearly states the price of your solar PV panels, separately from other items. With this invoice, you should also provide proof of payment.
2. For individuals or corporations to claim tax returns: A certificate of compliance, depending on the requirements of the incentive you apply for.

What types of solar panel systems qualify for tax incentives in the UK?

Two types of solar panel systems qualify for these tax incentives: solar photovoltaic systems (solar PV systems), and solar thermal systems. Solar PV panels generate electricity from sunlight using photovoltaic cells, whereas solar thermal systems heat up water for various reasons (i.e., hot water supplies and space heating). Check out our in-depth article on the differences between solar panels and solar thermal systems.

How much can I save on taxes by installing solar panels in the UK?

This depends on the incentive you choose to apply for. However, you could save between 2.5% and 100% of tax payments, and could even cover the whole solar panel installation costs.

Final Thoughts

If you’re looking for more information on solar panel installations or want to install solar on your property, don’t hesitate to contact us or fill in our online form for a free solar quote!

Our team of experts will gladly help you through every step of your journey to reduce carbon emissions, improve energy efficiency and benefit from solar energy.