By Mark Amery —

Low-coupon gilts offer a better return than the best fixed-term savings accounts on the market

Here is a point I only figured out recently, that I have rarely seen anyone explicitly make, and that I suspect the vast majority of normal people with savings and investments are completely unaware of: if you live in the UK, and you pay at least basic rate income tax and expect to keep doing so, and you are locking up some of your cash in fixed-term savings accounts, you are leaving money on the table. You can get better returns (while still having basically no risk, unless you worry about a government default) by buying low-coupon gilts on the secondary market.

The best fixed-term GBP savings accounts right now (as of May 2026), of any term length, pay around 4.75% interest. (Source: the "Top Savings Accounts" list on Money Saving Expert.) But you have to pay income tax on that interest, so net of interest, you are getting only 3.8% (if you pay basic rate income tax) or 2.85% (if you pay higher rate income tax) or even less than that (if your income is over £100k and you have either a 60% or 45% marginal rate).

Compare that with, say, the TG27 gilt that matures in July 2027. This gilt's nominal interest rate - its "coupon" - is a mere 1.25%, which was no doubt reasonable when it was issued in 2017 but is now pathetic. But as a result, the bond trades on the London Stock Exchange for significantly less than its "face value". That is, for gilts with a total face value of £10,000, you only need to pay £9,680, and then in addition to interest of 1.25% on the £10,000, you also get £10,000 back in July 2027 when the bond matures. Before tax, this works out equivalent to a 4.433% AER.

That sounds worse than a 4.75% fixed-term savings account... except returns from bonds and gilts are taxed differently from interest on a savings account. The nominal interest you get - the 1.25% - is taxed as income, just like bank interest. But the £320 difference between the £10,000 that gets returned to you at maturity and the £9,680 you paid for the bond is considered a capital gain, not interest. And, in the specific case of UK government gilts (unlike other bonds), that capital gain is exempted from Capital Gains Tax.

So:

  • You spend £9680 (the "dirty price") today buying gilts on the stock exchange. £9641 of that is the "clean price" you are considered to have paid for the gilt itself, and the other £39 pays off the previous owner for the interest the gilt has accrued since its last interest payment.
  • You receive £188 (actually £187.50, but I'm rounding everything to the nearest pound for simplicity) of actual interest, in three payments, between now and maturity. That's £188 - £39 = £149 of taxable income, on which you pay £30, £60, £90, or £67 of Income Tax (depending upon your income tax band).
  • You receive £10,000 and owe absolutely no tax on it.
  • Supposing you are a higher rate taxpayer, net of tax you have made £10,000 + £188 - £9680 - £60 = £448. That's a 4.6% return (net of tax) on your initial investment, but it was over a little over a year, so it works out to a (net of tax) 3.9% AER.

Obviously this beats the 2.85% you can get from a savings account, and it's not close! In fact, the net return a higher-rate taxpayer makes on this gilt beats the return a basic-rate taxpayer makes on the highest-rate savings account on the market. It also beats the current 3.3% return offered by NS&I premium bonds (which are tax exempt). There is just no reason for anyone who pays income tax to lock any money up in fixed-term accounts; if you're contemplating doing so, open a brokerage account (e.g. with Hargreaves Lansdown) and buy gilts instead.

(Also, of course, you retain liquidity, unlike with a fixed-term savings account. That is, you can sell the gilts, if you want to, at whatever the market price is on any given day. The analysis above assumes you're not going to do that, and will just hold them to maturity.)

https://giltsyield.com/bond/ seems to be a good resource for getting an overview of what bonds are available and what they pay (even letting you enter you marginal Income Tax rate and view yields net of tax, or see the "grossed-up yield" - the nominal interest rate a savings account would have to pay to provide the same after-tax return). As a UK taxpayer buying gilts, you want to filter to the "Low Coupon" ones (since these are the ones where most of the yield comes from the capital gain at maturity, and is therefore tax-free).

There is only one thing about all this I'm not sure I understand: why are the tax rules this way? It's odd to exempt gilts from CGT but not from Income Tax. It means that gilts with high coupons, or issued in a period when interest rates remain the same for a long time, effectively get no tax relief (because all of your return from them is interest and taxed as income), but when interest rates increase and old gilts with weak interest rates drop in price as a result, those old gilts become tax-advantaged. I guess this mitigates how much the market value of gilts drops when interest rates rise, and so makes them less risky for investors who don't want to hold them to maturity? Still feels a bit arbitrary!