For a profitable farm, capital allowances are usually worth more than any grant. They are open all year, they apply in every UK nation, and for most farm roofs they let the whole cost of a solar system come off taxable profits in the year it is bought. This guide sets out how solar panels are treated, which relief each kind of farm business can use, and the four farm-specific traps: mixed partnerships, grants, farmhouse use and the Agricultural Flat Rate Scheme.
General guidance on how the rules work, checked against the legislation on 29 September 2026 — not advice on a particular business. Your accountant will apply it to your figures.
How solar panels are classified
Solar panels are plant and machinery for capital allowances, but not ordinary plant. Section 104A(1)(g) of the Capital Allowances Act 2001 makes expenditure "on the provision of solar panels" special rate expenditure, and HMRC's manual confirms that all capital expenditure on solar panels has been designated special rate since April 2012. That single classification decides which reliefs are available — and rules out the two headline allowances that most business-tax coverage talks about.
The reliefs, and who can use them
| Relief | Applies to solar? | Who can claim | Legislation |
|---|---|---|---|
| Annual Investment Allowance — 100% in year one, up to £1 million a year | Yes | Individuals, partnerships whose members are all individuals, companies | s51A, s38A(3) |
| 50% first-year allowance for special-rate assets | Yes | Companies within corporation tax, on new and unused assets | s45S |
| Special rate pool — 6% a year, reducing balance | Yes | Any business, for cost not relieved another way | s104D |
| Full expensing — 100% for main-rate plant | No | Companies, main-rate plant only | s45S |
| 40% first-year allowance from 1 January 2026 | No | All businesses, but not special rate expenditure | s45U |
| Main-rate writing-down allowance — now 14% | No | Main-rate pool only | s56 |
Two 2026 changes are easy to misread. The main-rate writing-down allowance fell from 18% to 14% from April 2026, but solar sits in the special rate pool, whose 6% rate did not change. And the new 40% first-year allowance, open to unincorporated businesses as well as companies from 1 January 2026, is expressly limited to expenditure that "is not special rate expenditure" — so it does not help with solar.
Which relief to use, by type of farm business
- Sole trader, or a partnership of individuals: the Annual Investment Allowance, which deducts the whole cost of a farm system in the year of purchase. The £1 million annual limit is shared with any other plant bought that year, such as a tractor or a grain dryer.
- Limited company: the Annual Investment Allowance as well. The 50% first-year allowance is also available, and matters mainly once spending passes the £1 million AIA limit — for a typical farm roof, the AIA gives more relief, sooner.
- Partnership with a company as a member: section 38A(3) limits the AIA to individuals, all-individual partnerships and companies, and the 50% first-year allowance is for companies — so a mixed partnership is normally left with the 6% special rate pool. On a £63,100 system that is £3,786 of deduction in year one instead of £63,100. If your farm is structured this way, take advice before you buy; who incurs the expenditure matters.
- If you do not own the panels: under a power purchase agreement or a roof lease, the funder or developer who owns the system claims the allowances, not the farm. That is part of the price of the arrangement — see farm solar finance options.
Grants reduce the claim
Section 532 of the Act treats expenditure as not incurred to the extent that it has been, or will be, met by a public body. HMRC's manual describes the result: the contribution is deducted from the expenditure and the business gets capital allowances on the net amount. So a grant is never worth its face value to a farm that pays tax.
On a 50 kW system at the DESNZ 2025/26 median of £1,262 per kW — £63,100 — a 25% grant of £15,775 would leave £47,325 to claim on. For a company paying 25% corporation tax the grant is worth £11,831 after tax (75% of its face value); for a sole trader paying 40% income tax, £9,465 (60%). We work through the full sum in is a farm solar grant worth its face value after tax?, and the current status of every scheme is on our page of solar grants for farmers — in September 2026, none that funds solar panels is open.
Farmhouse use
Many farm arrays feed the farmhouse as well as the yard. Where plant is used partly for the business and partly for other purposes, section 205 reduces the Annual Investment Allowance or first-year allowance to an amount that is "just and reasonable" in the circumstances. For a sole trader or partnership, that normally means excluding the share of the output used privately in the house. Keep a record of how the output is split — a sub-meter on the farmhouse supply is the simplest evidence.
VAT and the Agricultural Flat Rate Scheme
A VAT-registered farm business normally reclaims the 20% VAT on solar for business premises, so the relief is on the net-of-VAT cost. Farmers in the Agricultural Flat Rate Scheme are different: HMRC's notice says flat-rate farmers "do not account for VAT or submit returns and so cannot reclaim input tax" (they charge a 4% flat-rate addition instead). For them, the VAT on a solar system is a real cost. The 0% energy-saving materials rate applies only to residential accommodation and relevant charitable use, so it can cover panels serving the farmhouse but not the farm business.
Worked example: a 50 kW farm roof
| Business | Relief used | Deduction in year one | Tax saved in year one |
|---|---|---|---|
| Sole trader, 40% income tax | Annual Investment Allowance | £63,100 | £25,240 |
| Company, 25% corporation tax | Annual Investment Allowance | £63,100 | £15,775 |
| Company, 25% corporation tax | 50% first-year allowance instead | £31,550, then 6% a year on the rest | £7,888 in the first year |
| Partnership with a company member | 6% special rate pool | £3,786 | Depends on the partners' tax rates |
System cost: 50 kW × £1,262 per kW (DESNZ Solar PV cost data 2025/26, median for 10–50 kW) = £63,100. Assumes profits large enough to absorb the deduction and no private use. Income-tax rate for England, Wales and Northern Ireland; Scottish bands differ. Illustrative arithmetic, not tax advice.
The deduction is the easy part; what makes solar pay is the electricity it replaces. Our farm solar cost guide shows what systems cost and generate, and whether solar panels affect farm business rates covers the other tax that farmers ask about.
Capital allowances on solar panels — frequently asked questions
Do solar panels qualify for capital allowances?
Yes. Solar panels are plant and machinery, designated as special rate expenditure by section 104A of the Capital Allowances Act 2001 (from April 2012). Most farm businesses can deduct the whole cost in the year of purchase through the £1 million Annual Investment Allowance.
Can solar panels be claimed under full expensing?
No. Full expensing is a 100% first-year allowance for main-rate plant bought by companies, and solar panels are special rate. Companies can instead claim the 50% first-year allowance for special-rate assets — though for most farm systems the Annual Investment Allowance gives more relief sooner.
Does the new 40% first-year allowance apply to solar panels?
No. The 40% first-year allowance for expenditure from 1 January 2026 (section 45U) excludes special rate expenditure, and solar panels are special rate.
What is the capital allowance rate for solar panels?
Up to 100% in year one through the Annual Investment Allowance (up to £1 million a year). Anything not covered goes into the special rate pool at 6% a year on a reducing balance, or — for companies only — can take a 50% first-year allowance first.
Does a solar grant affect capital allowances?
Yes. Under section 532, expenditure met by a public body does not qualify, so allowances are given on the cost net of the grant. A 25% grant is therefore worth about 75% of its face value to a company paying 25% corporation tax.
Can a farm partnership claim the Annual Investment Allowance on solar?
Only if all its members are individuals. Section 38A(3) limits the allowance to individuals, partnerships of which all the members are individuals, and companies — so a partnership with a company as a member cannot claim it, and the 50% first-year allowance is for companies only.
Sources
- Capital Allowances Act 2001 (legislation.gov.uk, checked 29 September 2026): sections 38A, 45S, 45U, 51A, 56, 104A, 104D, 205 and 532.
- HMRC Capital Allowances Manual: CA22335 (solar panels designated special rate) and CA14100 (contributions).
- HM Treasury / HMRC, "Capital allowances: new first-year allowance and reducing main rate writing down allowances" (26 November 2025).
- HMRC, Agricultural Flat Rate Scheme (VAT Notice 700/46).
- DESNZ, Solar PV cost data 2025/26.