Does solar qualify for the 40% first-year allowance?

If you have read about the new 40% first-year allowance and wondered whether it applies to a solar installation, the answer is no. Solar sits in a different category of expenditure from the one the allowance was written for. This is the first question most business owners ask when they see the headline, and a lot of general coverage does not draw the distinction.

That is not bad news. The relief that does most of the work for commercial solar — the Annual Investment Allowance — is unaffected and gives 100% relief on qualifying spend up to £1 million a year. For a typical rooftop project, that is a better outcome than 40% would have been.

This guide is general information, not tax advice. PPA Funding is an independent introducer, not a tax adviser. Your own claim depends on your business structure, your accounting period and what else you have spent in the year, so confirm the treatment with your accountant.

Capital allowances split qualifying plant and machinery into two categories: main rate expenditure, which goes into the main pool, and special rate expenditure, which goes into the special rate pool. HMRC describes the main rate as applying to all qualifying expenditure other than that specifically categorised as special rate.

Solar is specifically categorised. HMRC's Capital Allowances Manual at CA22335 states that with effect from 1 April 2012 for corporation tax and 6 April 2012 for income tax, all capital expenditure on the provision of solar panels is designated as special rate under section 104A of the Capital Allowances Act 2001. That covers both photovoltaic systems, which generate electricity, and solar thermal systems, which provide hot water.

GOV.UK's plain-English guidance says the same: solar panels appear on the published list of items that go in the special rate pool, alongside integral features, long life items and thermal insulation. This is not a matter of interpretation. Solar is named.

The 40% first-year allowance is available for expenditure incurred from 1 January 2026. HMRC's policy paper describes it as a first-year allowance of 40% for main rate expenditure, introduced to encourage investment where other first-year allowances are not available — for example on assets bought for leasing, and by unincorporated businesses.

That phrase, "for main rate expenditure", is the whole answer. Special rate expenditure is by definition not main rate expenditure, and solar is special rate. The same policy paper confirms the measure does not change the writing down allowance on the special rate pool, which is currently 6%.

This is not a rule that singles solar out. The 40% allowance targets a gap in the main pool, particularly for leased assets and unincorporated businesses. Solar is not in that pool.

The same measure reduces the main pool writing down allowance from 18% to 14% a year, from 1 April 2026 for businesses within the charge to corporation tax and 6 April 2026 for those within the charge to income tax. HMRC notes the main pool rate had been set at 18% since 2012.

If you own solar, this cut does not change your position, for the same reason the 40% allowance does not help it: solar was never in the main pool. Any solar expenditure written down rather than relieved in full sits in the special rate pool, at an unchanged 6%. The two changes are usually reported together as a trade-off. For solar, neither half applies.

The Annual Investment Allowance is the main route and covers most commercial solar projects outright. The AIA amount is £1 million, and it lets a business deduct the full value of a qualifying item from its profits before tax. GOV.UK guidance confirms that expenditure on special rate plant or machinery may qualify for the 100% Annual Investment Allowance, so being special rate is no barrier. Most commercial rooftop systems cost well under £1 million, so the AIA often absorbs the whole cost in the year of spend.

Above the AIA, companies may be able to use the 50% first-year allowance. HMRC's manual at CA23174AA is explicit: special rate expenditure may qualify for the 50% FYA but does not qualify for full expensing. GOV.UK sets out the conditions — a company subject to corporation tax, expenditure incurred on or after 1 April 2023, and plant that is new and unused, not a car, not a gift, and not bought for leasing, with limited exceptions.

Anything left goes into the special rate pool and attracts writing down allowances at 6% a year on a reducing balance. Nothing is lost; the relief simply arrives more slowly. So the realistic picture is: AIA first, then the 50% FYA if you are a company with headroom, then 6% writing down allowances on the balance.

Assume a company buys a new commercial rooftop system for £120,000 and has not used any of its Annual Investment Allowance that year. The cost is an assumption for illustration only, not a quote. The rates below are the published ones cited above.

The £120,000 falls within the £1 million AIA, so the company may deduct the full £120,000 from its taxable profits in the year the expenditure is incurred. The 40% first-year allowance is irrelevant here, and so is the main pool rate change.

Now assume the same company has already used its full £1 million AIA on other assets, then spends £200,000 on solar. If the 50% first-year allowance conditions are met, it may deduct 50% of £200,000, which is £100,000, in the first year. The remaining £100,000 goes into the special rate pool, where a 6% writing down allowance gives £6,000 in the following period, and 6% of the reducing balance thereafter. Your accountant should run the version reflecting your actual accounting period and spend.

Capital allowances only matter if you own the asset. Under a power purchase agreement the provider owns the system, so the business does not claim allowances on it; you are buying electricity rather than equipment.

If you are weighing a purchase against a PPA, ask your accountant what the allowances are actually worth in your position.