In an effort to combat climate change and encourage sustainable energy practices, the UK government has introduced a series of tax incentives for businesses investing in solar energy.
One of the biggest in terms of cost savings for most businesses is a 100% First Year Allowance (FYA) on solar panels.
In simple terms, this means as a business you’re able to deduct 100% of the value of your solar installation from your corporation tax bill.
Here’s a closer look at what this means for you and exactly how much money you could save on an installation and your energy bill as a whole.
How the 100% Capital Allowance on Solar Installation Costs Works
Since April 1, 2012, for corporation tax, and April 6, 2012, for income tax, capital expenditure on solar panels has been specifically categorised as "special rate expenditure." This means that when calculating capital allowances—tax relief on capital expenditure—solar panels are placed into a special rate pool. Unlike the general pool of assets, this special rate pool recovers tax relief at a slower pace.
This special rate pool is intended for assets with a longer economic life, such as solar panels. Businesses can claim capital allowances on these assets over time, thereby reducing their taxable profits gradually and spreading the investment cost over several years. The main advantage of this system is that it aligns the tax relief with the asset's useful life, giving a more accurate reflection of its depreciation and value to the business.
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) offers additional incentives for businesses investing in integral features like solar panels. The AIA allows businesses to deduct 100% of the cost of qualifying capital expenditure from their taxable profits in the year the expenditure occurs, up to a specific limit, currently set at £1 million under existing tax regulations.
This means a business can invest up to £1 million in solar panels and other qualifying assets and claim the total amount as a deduction against its taxable profits for that year. This immediate tax relief substantially lowers the effective cost of investing in solar technology, making it a more appealing option for businesses. The AIA is especially advantageous for small and medium-sized enterprises (SMEs), as it enables them to recover the cost of their investment more quickly, freeing up capital for other business needs.
Example of How Much Tax You Can Save With The 100% Capital Allowance Scheme
To illustrate the potential savings, here are some numbers:
Let’s say you spend £20,000 on installing solar panels.
With the 100% capital allowance, you’ll be able to deduct £20,000 from your company’s taxable profits.
This could mean a saving of £3,800 depending on the rate of corporation tax you pay.
With solar panels already a consideration due to saving money on ongoing energy bills, this saving has made it an easy decision for many businesses.
If you’re not sure exactly how much you stand to save, just give us a call on 01453 705915 and one of our technicians will be happy to work it out for you.
You Should Also Check for Grants
In addition to the capital allowance, you should also explore available grants for solar energy installations.
There are various government and private sector grants coming in and out throughout the year, and this can further offset the initial costs.
We recommend checking this GrantFinder page to see what grants are currently available.
Don't Forget the Savings on Your Energy Bills, Too
Beyond the immediate tax benefits and potential grants, solar panel installations can lead to considerable savings on energy bills.
Depending on the size and efficiency of the installation, businesses can expect to see a reduction in their energy costs.
On average, a commercial solar panel system can save thousands of pounds annually in electricity bills.
Obviously, these savings contribute to the overall financial attractiveness of solar energy while helping businesses become more energy-independent.
Free guide
There is a wealth of excellent information available online regarding solar energy; however, there is also plenty of misleading content out there.
With that in mind, we've created this handy guide for you to download for FREE. We hope it provides you with a clear overview of what solar PV and battery storage are, how they work, and how they can benefit you.
