Is interest on a solar loan tax deductible for a UK business?

A solar loan gives a profitable business two separate tax reliefs. The first is the capital allowance on the cost of the array, which is explained in capital allowances on solar panels. The second is relief for the interest the business pays to borrow the money. They are claimed under different rules, in different parts of the tax computation, and they do not cancel each other out. This page covers the second one. It is general information for a UK business, not tax advice: confirm the treatment with the accountant who signs the company's return.

Two reliefs, not one

If the business owns the array, whether it bought it with cash, a loan or a hire purchase agreement, it claims the Annual Investment Allowance on the installed cost. The allowance is £1 million a year (gov.uk), and most commercial systems fall inside it. Paying for the array with borrowed money does not change that claim: the allowance is on the cost, not on how the cost was funded. The interest is then a separate deduction from profit, so a borrower gets the cost relief up front and the interest relief over the life of the loan.

Companies: the interest line

A company that borrows to fund its trade normally brings the interest into its corporation tax computation as a debit under the loan relationship rules, which HMRC explains in its Corporate Finance Manual. In practice the interest in the accounts is the interest deducted, provided the loan was taken for the company's trade and the rate is a normal commercial one. Sole traders and partnerships follow the business income rules instead, where interest on borrowing for the business is allowed when it is incurred wholly and exclusively for the trade (HMRC Business Income Manual).

The value of the deduction is the interest multiplied by the corporation tax rate the company pays. The main rate is 25% on profits above £250,000 and the small profits rate is 19% on profits of £50,000 or less, with marginal relief between the two (gov.uk). A company that makes no taxable profit has nothing to set the interest against in that year, which is the same limit as for the capital allowance.

The £2 million limit

The one rule that can restrict interest relief for a large borrower is the Corporate Interest Restriction. It applies only to a company or group with net interest and financing costs above £2 million in a 12-month period (gov.uk). The test is on the group's net interest across all its borrowing, not on the solar loan alone. A single array loan is a small part of that figure for almost every business that reads this page. A group that is already close to the limit should have its tax adviser model the solar borrowing before signing.

Loan, hire purchase, lease

Which of these suits a business is a question about cash, credit and tax together, not tax alone. The finance route checker ranks the routes against your answers, and what lenders check before they lend covers the credit side.

Who gets no relief

A business that does not pay corporation tax gets no value from either relief. A charity whose income is exempt, a public body or a company in a loss has no tax bill to reduce, so the interest deduction and the capital allowance are worth nothing to it in that year. That changes the comparison between buying and leasing: the lessor can use the allowances and may price the rental lower for it. A company with trading losses may carry them forward and use the reliefs in a later year, so the answer is about timing as well as eligibility.

A modelled example

This is a modelled example with an illustrative rate, not a quote and not a client case. A company paying the 25% main rate borrows £200,000 to buy an array and holds the loan for the whole first year at 8%. Interest for the year is roughly £16,000 if nothing is repaid, and it falls as the balance is repaid. At 25% the interest relief for that year is about £4,000. Separately, the £200,000 capital allowance gives a corporation tax saving of £50,000 in the same year. The loan does not reduce the allowance, and the allowance does not reduce the interest relief. Real figures depend on the loan terms, the repayment profile and the company's profit in the year.

To see which route fits your own numbers, start with the finance route checker or read the green loan guide for the lender side.