Solar Panel VAT Now 0%

Solar panels and heat pumps VAT rate down to zero percent

The Government’s 2022 Spring Statement sprung a surprise for homeowners looking to install energy-efficient technologies such as solar panels and heat pumps. The Chancellor announced that VAT on these items will be cut from 5% to zero from April 2022.

The move is designed to encourage the installation of green technologies and could see homeowners save hundreds of pounds on installation costs. Three energy-saving technologies are included in the scheme. Let’s look at how each of them is impacted.

Solar panels

Both solar PV and solar thermal panels are included in the scheme. Solar PV panels are used to generate electricity which can then either be used or sent back to the grid. Solar thermal systems are cheaper but can only be used to heat water.

Before the VAT reduction, the cost of installing a solar PV system in a 3-bedroom house was between £5,000 to £8,000. While a solar thermal system for the same property would cost between £4,000 and £5,000.

Solar PV is more expensive, but the advantage of installing this type of system is that any spare energy generated can be exported back to the grid. Homeowners are then compensated for this under the Smart Export Guarantee scheme.

Heat pumps

Heat pumps work by extracting heat from the air, water or ground outside. This heat is transferred to a refrigerant, which is then compressed to raise its temperature. Heat stored in the refrigerant is then transferred to water which is pumped to the radiators.

The cost of installing a heat pump in an average-sized 3-bedroom home varies depending on the type of heat pump installed, but expect installation costs to be anywhere from £3,000 to £18,000.

There are three types of heat pumps. Air source heat pumps are the cheapest to install but the least efficient. Ground source pumps require a ground loop which significantly increases installation costs, while water source heat pumps are the most efficient, but they require a nearby watercourse.

The VAT reduction will reduce installation costs by up to £900, but grants of up to £6,000 are also available from the ‘Boiler Upgrade Scheme’ to help pay for installation. You can check if you qualify for a grant here(opens in a new window).

Insulation

Insulation is one of the most effective ways of reducing heat loss in your home. And yet, Government data(opens in a new window) shows that only 39.3% of UK homes have the minimum recommended standard of 200mm of loft insulation installed.

The typical cost of topping up your loft insulation from 120mm to 270mm is between £400 and £550. This will result in annual cost savings(opens in a new window) of between £20 and £40 and could see you cut your carbon emissions by 50-95kg depending on the property. These savings are more than quadrupled if you don’t have any loft insulation installed.

It’s also worth noting that heat pumps require homes to be properly insulated if they are to work efficiently. To qualify for the ‘Boiler Upgrade Scheme’ homeowners must ensure their home is insulated to the required standard.

Conclusion

The decision to cut VAT on renewable technologies is welcome and should encourage homeowners to adopt such technologies sooner. Especially since VAT is cut to zero for both equipment and labour costs. Homeowners could therefore save around £300 on a typical solar installation and up to £900 on a heat pump installation.

And don’t forget VAT is reduced on insulation as well, making it a perfect time to upgrade your home’s insulation and eligibility for the ‘Boiler Upgrade Scheme’ grant.

Key Takeaways

• 0% VAT rate on energy-saving technologies starts from April 2022 and will last 5 years.
• 0% VAT rate applies to solar PV/thermal, heat pumps and insulation.
• Homeowners must have loft insulation installed before applying for the ‘Boiler Upgrade Scheme’.