Tax Incentives for Solar Energy in England: Maximise Your Savings with Solar Panels
As solar energy gains momentum, homeowners and businesses across England are increasingly enjoying its environmental and financial benefits. In 2023 alone, over 180,000 solar panel systems were installed in the UK—a remarkable 30% rise from the previous year. This surge highlights the growing appeal of renewable energy solutions like solar panels.
Solar panels provide free, renewable, and low-carbon energy, significantly cutting electricity bills by reducing reliance on mains electricity. While the initial installation cost can be substantial—ranging from several thousand pounds for households to tens of thousands for larger businesses—government-backed tax incentives make solar energy a more affordable option. Homeowners can benefit from VAT reductions and grants, while businesses enjoy tax allowances. Additionally, both can earn money by exporting surplus solar energy back to the grid.
This comprehensive guide explains how these tax incentives work and how much you could potentially save by switching to solar energy.
Solar Panel Sizes, Costs, and Savings
The size of your solar panel system directly affects installation costs and the extent to which you can reduce your energy bills. On average, solar panels can cut electricity bills by around 70%. Solar panel systems are measured in kilowatts (kW), and here’s how different sizes impact costs and savings:
• 3kW System: Ideal for smaller households, this system costs approximately £6,000 to £8,000 and can reduce your annual energy bills by about £470.
• 4kW to 5kW Systems: Suitable for medium-sized homes, these systems range from £8,000 to £11,000, offering annual savings of around £690.
• 6kW System: Perfect for larger households, this system costs around £13,500 and can save you approximately £1,100 per year on energy bills.
VAT Incentives on Solar Panels
Value-Added Tax (VAT) is a consumption tax placed on goods and services, traditionally set at a standard rate of 20% in the UK. However, to encourage the adoption of renewable energy solutions like solar panels, the government offers reduced VAT rates for energy-saving materials installed in residential properties.
Zero VAT on Solar Panels Until 2027
Previously, VAT on solar panels for homes was 5%, but in April 2022, the government reduced it to 0%, a rate set to last until April 2027. Initially applicable to households in England, Wales, and Scotland, this zero rate was extended to Northern Ireland in May 2023.
To qualify for the 0% VAT rate, the solar panels must be supplied and installed by the same company. If you purchase solar panels from one provider and have them installed by another, a 5% VAT rate applies to the installation cost. Maintenance or repair services for existing solar panel systems are also subject to the 5% VAT rate.
Average Savings with Zero VAT
The zero VAT rate can save you several hundred pounds on your solar panel installation. For example, a medium-sized household might require a 4kW to 5kW system priced at £10,000. Under the standard 20% VAT rate, the cost would rise to £12,000. With the previous 5% VAT rate, the total would be £10,500. Thanks to the 0% VAT rate, you pay only the original £10,000, significantly reducing your upfront costs.
VAT on Solar Batteries
Solar batteries enhance the efficiency of your solar panel system by storing excess energy generated during daylight hours for use at night or during periods of low sunlight. This not only maximises your use of renewable energy but also further reduces your dependence on the grid.
Initially, the 0% VAT rate on solar batteries applied only when they were installed simultaneously with your solar panels. However, as of February 2024, the government extended the VAT relief to include solar batteries installed at any time, regardless of when your solar panels were fitted. This means you can now add a solar battery to your existing system without incurring additional VAT costs.
VAT on Energy Consumption
While VAT on the installation of solar panels and batteries has been reduced, VAT on electricity and gas consumption remains at 5% for households. Businesses, however, continue to pay the standard 20% VAT rate on energy bills. Currently, there are no announced plans to reduce VAT on energy usage further.
Solar Tax Incentives for Businesses
For small and medium-sized enterprises (SMEs), installing solar panels can be a significant investment, often costing between £50,000 and £100,000. While businesses do not qualify for VAT relief and must pay the full 20% VAT on installation costs, they can take advantage of other financial incentives.
Annual Investment Allowance (AIA)
The Annual Investment Allowance allows businesses to deduct up to 100% of the cost of solar panel installations from their taxable profits. This means the entire cost of the solar panels can be written off against the company’s pre-tax profits, effectively reducing the amount of corporation tax owed.
Solar Tax Credits
Businesses can also benefit from Investment Tax Credits (ITCs), which enable them to deduct a percentage of the solar installation costs from their taxable income. This reduction lowers the overall tax liability, making the investment in solar energy more financially viable.
Smart Export Guarantee (SEG)
Both homeowners and businesses can earn money by exporting surplus solar energy back to the National Grid through the Smart Export Guarantee (SEG). Launched in 2020 to replace the previous Feed-in Tariff (FiT) scheme, the SEG is regulated by Ofgem (the Office of Gas and Electricity Markets).
To participate, you need to apply directly to a SEG-licensed electricity supplier. Your solar panel system must be certified under the Microgeneration Certification Scheme (MCS). Once approved, you will receive payments for each unit of electricity you export. Rates vary between suppliers, so it’s advisable to shop around for the best tariff.
It’s worth noting that while homeowners are not taxed on SEG income, businesses must declare it as trading revenue, which can be offset against profits to reduce corporation tax liability.
Energy Company Obligation Scheme
Low-income households receiving means-tested benefits may qualify for grants to install solar panels through the Energy Company Obligation (ECO) scheme. Now in its fourth phase, ECO4 was launched in 2022 with a budget of £4 billion and is scheduled to run until March 2026.
The scheme aims to alleviate fuel poverty and reduce carbon emissions by improving the energy efficiency of homes with low Energy Performance Certificate (EPC) ratings. Under ECO4, eligible households can receive funding to cover up to the full cost of solar panel installations, particularly if other heating solutions like heat pumps or biomass boilers are unsuitable.
LA Flex
The Local Authority Flexible Eligibility (LA Flex), also known as ECO4 Flex, extends the ECO scheme to households not receiving means-tested benefits but still struggling with fuel poverty. Local councils set their own eligibility criteria, broadening the scope of households that can benefit from solar grants.
Home Upgrade Grant (HUG)
The Home Upgrade Grant offers up to £10,000 towards solar panel installations for homeowners in specific postcode areas in England who are off the gas grid and have a combined annual income of £31,000 or less. The £700 million scheme is managed by local authorities and is scheduled to continue until March 2025.
Maximising the Benefits of Solar Tax Incentives
Government incentives and tax reliefs significantly reduce the financial barriers to installing solar panels, making renewable energy more accessible for both homeowners and businesses. By taking advantage of these schemes, you can lower your energy bills, reduce your carbon footprint, and, in some cases, even generate income.