Gilts: Over 100,000 savers now have more than £5,000 of annual interest

The Bank of England's base rate is currently 3.75%, and one-year fixed-rate accounts are still offering returns at 4.8% AER, meaning cash savings are once again generating meaningful returns.

Whilst this is good news for savers, it can create an unexpected and unwelcome tax bill.

Recent analysis suggests that more than 100,000 savers now receive over £5,000 of savings interest each year. As a result, many higher and additional rate taxpayers are finding that a growing proportion of their returns are being lost to income tax.

For those holding significant cash balances, it may be worth considering alternatives that can improve the tax efficiency of their returns. One option that has attracted increasing attention is UK Government gilts.

What makes gilts different?

A gilt is, in simple terms, a loan to the UK Government.

When you purchase a gilt, you receive a fixed level of interest, known as the coupon, and, provided you hold the investment until maturity, the Government repays the bond’s face value at the end of the term.

For many investors, the real attraction lies in the way gilts are taxed. While the coupon payments are subject to income tax, the gain achieved between the purchase price of the gilt and its redemption value is generally exempt from Capital Gains Tax.

This creates a particularly interesting opportunity with low-coupon gilts that are trading below their redemption value. In these cases, a larger proportion of the overall return is delivered through capital appreciation rather than taxable interest.

The result is that, for some investors, the after-tax return from a gilt can be significantly higher than that available from a traditional cash savings account.

A real-world example

At the time of writing (1 September 2026), a UK gilt maturing on 31 January 2028 offers an indicative yield of approximately 4.16%.

At first glance, that may not sound especially competitive against the best one-year fixed-rate savings accounts paying around 4.85%.

However, the comparison changes dramatically once tax is considered.

Because almost all of the gilt's return is expected to arise through the tax-free uplift between the purchase price and redemption value, a higher-rate taxpayer could achieve an after-tax return of approximately 4.11%.

To achieve the same net return from a taxable savings account, that investor would require a bank interest rate of around 6.85%.

At present, no mainstream bank comes close.

As such, gilts have become increasingly popular among higher-rate and additional-rate taxpayers holding large cash balances.

How secure are gilts?

Security is often the first consideration when deciding where to hold cash reserves.

In that regard, few borrowers are considered more financially secure than the UK Government. Gilts are issued and backed by HM Treasury, and the UK Government has an exceptionally strong record of meeting its obligations, having never failed to make an interest payment or repay investors at maturity.

While no investment can be considered entirely risk-free, gilts are widely regarded as among the lowest-risk investments available from a creditworthiness perspective. For investors seeking a combination of security, predictability and potentially attractive after-tax returns, they can represent a compelling alternative to holding large sums in cash.

What about access to the money?

Liquidity is another important factor to consider.

Many fixed-term savings accounts require your money to remain invested until the end of the agreed term, with early withdrawals either restricted or subject to penalties.

Gilts offer greater flexibility. Because they are traded on the market, they can typically be bought and sold whenever you choose, allowing access to your capital if your circumstances change or funds are needed sooner than expected.

That said, this flexibility comes with an important consideration. If you sell a gilt before it matures, the price you receive may be higher or lower than you originally paid, depending on market conditions, interest rates and the remaining term to maturity.

For this reason, gilts are often most suitable for investors who expect to hold them until maturity and are comfortable setting aside the funds for a defined period. Doing so provides greater certainty over the return achieved and allows investors to fully benefit from the gilt's tax and redemption characteristics.

The often overlooked tax planning opportunity

One of the lesser-known advantages of gilts is the positive impact they can have on a wider retirement income strategy.

This is particularly relevant for those retirees who, in light of pension legislation changes, now aim to draw from their pensions tax efficiently during their lifetime.

Where significant cash deposits generate several thousand pounds of taxable interest each year, a portion of an individual's basic rate tax band can be consumed before any pension withdrawals are taken. This may reduce the scope to extract pension income at lower rates of tax.

In contrast, certain gilts derive a greater proportion of their overall return from capital growth rather than taxable interest. As this uplift is generally free from Capital Gains Tax, less of an investor's income tax bands are used up.

The result is that more of those valuable tax bands can remain available for pension withdrawals, potentially allowing greater amounts to be drawn from a pension at lower rates of tax.

For investors seeking to manage their tax position carefully in retirement, this additional planning flexibility can be just as valuable as the return generated by the investment itself.

Not suitable for everyone

Despite their potential advantages, gilts are not a universal replacement for cash savings.

The strategy is generally most attractive for:

• Higher-rate and additional-rate taxpayers seeking to improve the tax efficiency of their savings.
• Individuals holding substantial cash balances outside of ISAs and pensions.
• Those who are comfortable holding the investment until maturity.

As with any financial planning decision, the right solution depends on your objectives, tax position and timeframe.

The bottom line

With higher interest rates resulting in many savers generating substantial amounts of taxable interest each year, the way cash is held and structured has become an increasingly important aspect of financial planning.

For some investors, UK Government gilts can provide a valuable combination of security, flexibility and tax efficiency, helping to improve the return retained after tax.

A review of your existing cash holdings could identify opportunities to enhance the tax efficiency of your savings and potentially increase your net return. If you would like to explore whether gilts may be appropriate for your circumstances, contact us today.