Solar tax relief explained - AIA vs Full Expensing vs FYA

Solar & BESS tax relief, explained properly

Most of what mid-market businesses hear about "100% tax relief on solar" is slightly wrong — not dishonest, usually just outdated or oversimplified by whoever's selling the panels. Here's what actually applies in the UK in 2026, in plain terms.

The headline: solar doesn't qualify for Full Expensing

Full Expensing is the government's 100% first-year deduction for plant and machinery — but it only applies to main-rate assets. HMRC classifies solar panels as a special rate asset (the same category as integral building features and long-life assets), so Full Expensing doesn't apply to them directly.

If a proposal you've received assumes Full Expensing on your solar spend, the numbers need re-checking.

What actually applies instead

1. Annual Investment Allowance (AIA) — the route most mid-market projects use

The AIA lets you deduct 100% of qualifying capital expenditure — including solar and battery storage — from your taxable profits in the year you incur the cost, up to £1 million per year. For most commercial installations, this covers the entire project cost in year one. Same practical outcome as Full Expensing, just via the correct mechanism.

2. 50% First-Year Allowance (FYA) — for spend above the AIA threshold

If your project (or your total qualifying capex for the year, including other purchases) exceeds the £1m AIA limit, the amount above that threshold can claim a 50% First-Year Allowance instead. The remaining 50% enters the "special rate pool" and is written down at 6% a year on a reducing balance.

3. Export income — it's usually more than just SEG

Separately from tax relief, there's real money in what you export back to the grid — but the headline is worth unpacking, because the number most people quote isn't the one commercial sites actually get.

The baseline: Smart Export Guarantee (SEG). Ofgem-licensed suppliers must offer commercial exporters a SEG tariff, and typical commercial rates currently run in the 4–15p/kWh range. The 20–25p headline figures you'll see advertised are almost always domestic tariffs, often tied to buying your system and import supply from that same supplier, and usually locked to a 12-month promotional window before reverting to a much lower rate. Build your funding case on the conservative commercial figure, not the domestic headline.

The realistic upside: flexible/dynamic export tariffs. Where a site has a half-hourly settled meter and a smart inverter, dynamic export products (the commercial equivalent of tariffs like Octopus's Agile/Shape Shifters Outgoing) pay a variable rate that tracks wholesale prices through the day — meaning exports during genuine peak demand periods can be worth considerably more than a flat SEG rate, sometimes into the high-teens or touching 20p/kWh at the best half-hours. Pairing this with battery storage lets a site hold exported power back from low-price periods and release it into the high-price windows, which is where the real uplift comes from — this is one of the main reasons BESS strengthens a project's business case beyond just backup and self-consumption.

The one to watch: Ofgem's "Complex Site Class" reforms (BSC modifications P441 and P442). These are worth understanding now, even though P441 is still pending a final Ofgem decision at the time of writing:

• P442 is already approved and live. It clarifies and widens licence-exempt local supply — broadly, the rules that let a generator sell power directly to nearby businesses (a private-wire or behind-the-meter PPA arrangement) rather than only exporting to the grid at a supplier's rate. For a site with spare rooftop capacity and a neighbouring business with meaningful demand, this route can be worth materially more per kWh than SEG.

• P441 would formalise six defined "Complex Site Classes" in the Balancing and Settlement Code, and — most relevantly here — would clarify when import and export across multiple meters on one site can be netted off against each other, with the netted volume exempt from certain network levies (BSUoS). It was submitted to Ofgem for a final decision in March 2026 and remains pending. If approved, it mainly benefits multi-meter or multi-building sites and local-supply/community energy schemes by reducing network costs on power that's generated and used locally — it's a cost-avoidance and netting mechanism more than a direct per-kWh price, but it increases the effective value of every unit of self-generated power on qualifying sites.

The practical takeaway: model your funding case on a conservative SEG floor, but if your site has multiple meters, a neighbouring business that could take a direct supply, or a half-hourly settled connection, it's worth flagging that as upside worth a closer look — this is exactly the kind of site-specific detail an independent assessment should surface rather than gloss over with a generic "up to 20p/kWh" headline.

A worked example

A business spends £180,000 on a commercial solar + battery installation, fully within the £1m AIA threshold for the year:

• Full £180,000 deducted from taxable profits in year one via AIA

• At a 25% corporation tax rate, that's a £45,000 reduction in the tax bill in the year of purchase

• Combined with ongoing electricity cost savings and export income (SEG as the conservative floor, with dynamic tariffs or local supply as potential upside), this is typically what drives the 4–6 year payback periods seen across UK commercial solar in 2026

(Illustrative only — your actual position depends on your company's tax rate, other capital spending in the same year, and specific circumstances. This is general information, not tax advice — always confirm the detail with your accountant before relying on it.)

What about battery storage (BESS)?

Broadly, yes — battery storage gets you to the same practical outcome as solar: the Annual Investment Allowance still gives 100% first-year relief on BESS spend, up to the same combined £1m annual cap that solar shares. For most mid-market projects, that's the only number that matters, and it's identical for both technologies.

Where it gets genuinely more nuanced — and where we'd flag "confirm with your accountant" rather than state a blanket rule — is which pool the battery spend falls into for anything above the AIA threshold, or once AIA is exhausted:

• Solar panels are consistently treated as an integral feature of the building's electrical system, which puts them in the special rate pool (6% writing-down allowance thereafter) almost without exception.

• Battery storage is less clear-cut. Where it's installed as a fixed part of the building's electrical infrastructure, HMRC treatment tends to mirror solar (special rate pool). Where it's a standalone, freestanding unit — a containerised or cabinet system not fixed into the building's wiring — a reasonable case can sometimes be made for general plant and machinery treatment (main pool, 14% writing-down allowance thereafter, a faster rate).

In practice this distinction only bites once a project is large enough to exceed the £1m AIA cap in a given year — most mid-market solar + BESS projects never get there, so the AIA figure is the one to build a business case around. For larger projects, it's worth getting the installation method and the pooling treatment confirmed in writing by an accountant before the spend, rather than assuming either way.

Why this matters before you fund anything

Getting the tax treatment right changes the real payback period and the real cash-flow impact of a project — which is exactly the kind of detail that should be settled before you're comparing finance options, not after you've signed something.