Capital allowances on commercial heat pumps
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 | Generally not available | Full expensing is for main-rate plant; integral-feature heating plant is special-rate, so the route is AIA |
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 public-sector and industrial routes (PSDS, IETF, GHNF).
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.