If you have cash sitting in a standard savings account paying 4.5%, and you’re a higher-rate taxpayer, the taxman takes 40% of that interest. On £10,000 saved, that’s £180 in tax you lose each year. UK savings bonds — often called gilts — offer a way to potentially keep more of that interest, because the gain comes from a price rise rather than income. Here’s what you actually need to know.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
UK savings bonds are essentially loans you make to the government. The government pays you a fixed interest rate (the coupon) twice a year, and at the end of the bond’s term, you get your original investment back. What makes them interesting for savers is that the interest is taxed as income, but any profit you make from buying the bond below its face value and holding it to maturity is treated as a capital gain — and gains on gilts are free from capital gains tax. That distinction matters a lot if you’re a higher-rate taxpayer who has already used up your personal savings allowance. For a closer look at how different investment types compare, you might find this guide to short-term investments in the UK useful.
Here’s what you actually need to know.
Before going further, it helps to pin down one term you’ll see everywhere. A
How gilt rates, prices, and tax interact for different savers
The numbers on a gilt’s fact sheet can be misleading. A gilt might show a 4% coupon, but if you buy it above its face value (called a premium), your actual yield to maturity is lower than 4%. If you buy it below face value (a discount), your yield is higher. The real return depends on the price you pay, not just the coupon rate.
For a basic-rate taxpayer earning £50,000, the personal savings allowance covers £1,000 of interest. If a gilt pays £800 in coupons each year, that’s within the allowance — no tax due. A higher-rate taxpayer earning £60,000 only gets a £500 allowance. The same £800 in coupons means £300 is taxable at 40%, costing £120 in tax. The capital gain from buying the gilt at a discount and holding to maturity, however, is tax-free regardless of your tax band.
The table below shows how the tax treatment changes across different taxpayer bands for a typical gilt investment.
→ Scroll right to see all columns
| Taxpayer band | Personal savings allowance | Tax on coupon income above allowance | Tax on capital gain from holding to maturity |
|---|---|---|---|
| Basic rate (20%) | £1,000 | 20% | 0% |
| Higher rate (40%) | £500 | 40% | 0% |
| Additional rate (45%) | £0 | 45% | 0% |
What this means in practice: a higher-rate taxpayer with £30,000 in a savings account earning 4.5% would earn £1,350 in interest. After the £500 allowance, £850 is taxed at 40% — a £340 tax bill. If that same £30,000 were in a gilt bought at a discount with a 2% coupon and a 2.5% annualised capital gain, the coupon income would be £600 (only £100 above the allowance, costing £40 in tax), and the £750 capital gain would be tax-free. Total tax: £40 instead of £340.
Common mistakes people make with UK savings bonds
Buying a gilt without checking the dirty price
When you buy a gilt between coupon payment dates, you pay the “dirty price” — the market price plus the accrued interest since the last coupon. That accrued interest is added to your purchase cost and is taxable as income when you receive the next coupon. Many first-time buyers see the clean price and think they’re getting a bargain, only to find their actual yield is lower. Always check the dirty price before buying. You can find it on the London Stock Exchange website or your broker’s platform.
Selling before maturity and losing the tax advantage
The capital gains tax exemption on gilts only applies if you hold to maturity. If you sell early, any gain is still tax-free (gilts are exempt from CGT regardless), but you’re exposed to price movements. If interest rates rise, gilt prices fall. A 1% rise in interest rates can knock 5–10% off the price of a long-dated gilt. If you need the money before the bond matures, you could sell at a loss. The fix is simple: only buy gilts with a maturity date that matches when you’ll need the cash.
Ignoring the coupon tax when comparing to savings accounts
It’s easy to compare a gilt’s yield to maturity against a savings account rate and pick the higher number. But the coupon payments are taxed as income, while savings account interest is also taxed as income. The difference is that the capital gain portion of a gilt’s return is tax-free. A proper comparison needs to calculate the after-tax return for both options based on your tax band. For a basic-rate taxpayer with plenty of allowance left, a savings account might actually win. For a higher-rate taxpayer, the gilt often comes out ahead.
Not using the ISA wrapper when you have allowance left
If you have £20,000 of ISA allowance available, holding gilts inside a stocks and shares ISA is simpler than trying to optimise the tax treatment outside. Inside an ISA, both the coupon and the capital gain are tax-free. No need to track allowances or file anything. The only reason to hold gilts outside an ISA is if you’ve already used your full allowance. If you haven’t, compare cash ISA options to see which wrapper suits your needs.
How to buy and manage UK savings bonds step by step
Choosing between individual gilts and gilt funds
You can buy individual gilts through a stockbroker or investing app, or you can buy a gilt fund or exchange-traded fund (ETF) that holds a basket of gilts. Individual gilts let you control the maturity date and the exact tax treatment. Gilt funds are simpler — you buy one product and get diversification — but you lose the ability to hold to a specific maturity date, which means you’re exposed to ongoing price volatility. For most beginners, a single gilt with a maturity date that matches your savings goal is the cleaner option.
Opening a dealing account and placing your first order
You need a brokerage account that offers UK gilts. Most major platforms — Hargreaves Lansdown, AJ Bell, Interactive Investor — list gilts alongside shares and funds. Once your account is open, search for the gilt by its name or ISIN code. You’ll see the clean price, the coupon rate, and the maturity date. Place a “buy” order at the market price. The minimum investment is typically £100 face value, but you’ll pay the market price, which could be slightly above or below that. The broker charges a dealing fee, usually £5–£12 per trade.
What happens between purchase and maturity
After you buy, the gilt appears in your portfolio. Twice a year, the coupon payment lands in your account — taxable as income. You don’t need to do anything else. When the gilt matures, the government repays the face value (usually £100 per £100 of face value) into your account. That repayment is the capital gain, and it’s tax-free. If you bought the gilt at £95, you get £100 back — a £5 tax-free profit per £100 of face value. If you bought at £105, you get £100 back — a £5 loss.
Upcoming changes to watch for in 2025 and beyond
The personal savings allowance has been frozen since 2016 and is not currently scheduled to rise. With inflation and interest rates higher than they were a few years ago, more people are being pushed above the allowance threshold. The government has not announced any changes, but the fiscal environment means the allowance is unlikely to increase soon. If you’re a basic-rate taxpayer whose savings income is creeping toward £1,000, a gilt strategy now could lock in tax-free capital gains before any future rule changes. Also watch for any changes to ISA allowances in future budgets — the £20,000 limit has been frozen since 2021.
Frequently asked questions about UK savings bonds
Can I lose money on a gilt if I hold it to maturity? ▾
Do I need to report gilt gains on my tax return? ▾
What’s the minimum amount I need to start investing in gilts? ▾
Are gilts better than Premium Bonds for higher-rate taxpayers? ▾
Can I hold gilts in a cash ISA? ▾
What happens to gilt prices if interest rates fall? ▾
Why the tax-free capital gain on gilts matters more than ever
With savings rates still well above the personal savings allowance for many people, the gap between gross interest and after-tax interest is wider than it’s been in years. A higher-rate taxpayer earning 4.5% on a savings account keeps just 2.7% after tax. A gilt yielding 4.5% to maturity, with half of that return coming from capital gain, keeps closer to 3.6% after tax. That difference compounds over time. The structural advantage of gilts — the CGT exemption — isn’t a loophole. It’s a deliberate feature of the tax system that rewards long-term lending to the government. For anyone with savings above the allowance thresholds, it’s worth understanding how it works.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Inflation-Proof Investing: Protecting Your Wealth in the UK Economy.
Sources and Further Reading
Investing Apps in the UK: Convenience or Risk? — A practical look at the platforms you might use to buy gilts and the trade-offs between ease of use and cost.
Moneysavingexpert (2024). UK Gilts and Lower Tax Savings. 🔗
Moneysavingexpert (2024). Best Savings Accounts. 🔗
Moneysavingexpert (2024). Cash ISAs. 🔗
Moneysavingexpert (2024). Premium Bonds. 🔗
