Capital allowances on commercial heat pumps: AIA, first-year allowances and a worked example
A commercial heat pump is capital plant, not a running cost — and the tax treatment reflects that. Getting the allowances right materially improves the after-tax cost of the install, so it belongs in the business case from the start, alongside any grant.
The allowances that apply
| Allowance | Rate | Applies to |
|---|---|---|
| Annual Investment Allowance (AIA) | 100% | First £1,000,000 of qualifying plant spend, in year one |
| Special-rate 50% First-Year Allowance (FYA) | 50% year one | Qualifying integral-feature spend above the AIA cap (balance in the special-rate pool) |
| Full expensing | Not available | Full expensing is for main-rate plant only; building heat pumps are special-rate plant, so the route is the AIA, then the 50% special-rate FYA |
A worked example
On a £250,000 commercial heat-pump installation, a limited company can typically claim 100% AIA against the qualifying plant in year one (it is within the £1m cap), reducing taxable profit by up to £250,000. At a 25% corporation-tax rate that is a first-year tax saving of up to £62,500, improving the effective net cost of the system. On a £1.4m scheme, the first £1m of qualifying spend attracts 100% AIA and the balance attracts the special-rate 50% first-year allowance, with the remainder written down at the special rate thereafter. The split between qualifying plant and general building works matters, and these figures are illustrative — your position depends on your profits, accounting period and other capital spend.
What about VAT?
The 0% VAT relief on heat pumps applies only to residential accommodation and buildings used solely for a relevant charitable purpose, and it is set to revert to 5% on 1 April 2027. General commercial premises do not qualify — most businesses pay standard-rate VAT and recover it in the normal way. See grants and funding for the current position on public-sector and industrial grant routes.
This page is general information, not tax advice. Capital allowances depend on your specific circumstances and the rules in force for your accounting period — confirm the position with your accountant before relying on it.