Compare a gilt and a fixed-rate savings account on what you keep after tax, not on the headline rate. Savings interest is taxed in full above your Personal Savings Allowance, at 20%, 40% or 45% in 2026 to 2027 and 22%, 42% or 47% from 6 April 2027 (HMRC), while most of the return on a low-coupon gilt is a gain that is free of capital gains tax (GOV.UK). Then compare what protects the money and how easily you can get it back: deposit protection up to £120,000 against the UK government’s own credit, and a fixed term against a market price.
Step 1: put both on an after-tax basis
For a savings account, the after-tax rate is the gross rate multiplied by one minus your savings tax rate, once your allowance is used. For a gilt, only the coupon is taxed; the gain between the price you pay and £100 at maturity is exempt (TCGA 1992, section 115). So the after-tax yield of a gilt depends on how much of its return comes from the coupon. Our explainer on low-coupon gilts shows why this matters most for gilts priced well below £100.
Step 2: account for the Personal Savings Allowance
The allowance applies to savings income, which covers bank interest and gilt coupons alike. It is worth £1,000 a year to basic-rate taxpayers, £500 to higher-rate taxpayers and nothing to additional-rate taxpayers (GOV.UK). HMRC says the allowance and the £5,000 starting rate for savings stay unchanged when savings rates rise in April 2027 (HMRC). A saver whose interest fits inside the allowance pays no tax on it, which can reverse the comparison.
| Income tax band | Personal Savings Allowance | Savings rate 2026 to 2027 | Savings rate from 6 April 2027 |
|---|---|---|---|
| Basic rate | £1,000 | 20% | 22% |
| Higher rate | £500 | 40% | 42% |
| Additional rate | £0 | 45% | 47% |
Sources: GOV.UK for the allowance, GOV.UK for 2026 to 2027 rates and HMRC for the 2027 to 2028 rates. The savings rates apply across the UK, including Scotland.
A worked example, with hypothetical numbers
Take £20,000 to set aside for two years and two invented options. The first is a two-year fixed-rate account paying 4.20% gross, with interest paid yearly. The second is a gilt with a 0.25% coupon and two years to run, bought at £92.93 per £100 nominal, which gives a gross yield to maturity of 4.00%. For simplicity the gilt pays one coupon a year and is bought on a coupon date; costs are ignored and 2027 to 2028 tax rates apply. These are illustrations, not current rates.
First, assume the saver’s allowance is already used by other interest, so every extra pound of interest is taxed.
| Tax band, 2027 to 2028 | Savings account after tax | Gilt after tax | Savings rate needed to match the gilt |
|---|---|---|---|
| No tax due | 4.20% | 4.00% | 4.00% |
| Basic rate, 22% | 3.28% | 3.94% | 5.05% |
| Higher rate, 42% | 2.44% | 3.89% | 6.70% |
| Additional rate, 47% | 2.23% | 3.87% | 7.31% |
Now assume the saver has no other savings income, so the allowance is free. The account pays £840 of interest a year. The gilt buys £21,521.57 nominal and pays £53.80 of coupons a year, with the rest of its return arriving as a tax-free gain at maturity.
| Tax band, 2027 to 2028 | Savings account after tax | Gilt after tax |
|---|---|---|
| Basic rate | 4.20%: all £840 falls within the £1,000 allowance | 4.00%: coupons within the allowance |
| Higher rate | 3.49%: £340 above the £500 allowance taxed at 42% | 4.00%: coupons within the allowance |
| Additional rate | 2.23%: all £840 taxed at 47% | 3.87%: coupons taxed at 47% |
The same two products change places depending on the saver. A basic-rate taxpayer with spare allowance keeps more from the account; a higher-rate taxpayer with only part of the allowance free, or an additional-rate taxpayer with none, keeps more from the gilt.
What the example leaves out
- Costs. Dealing commission and the spread between buying and selling prices reduce a gilt’s yield, and the effect is larger on small or short holdings.
- Timing. Real gilts pay coupons twice a year and are rarely bought on a coupon date, so you will usually pay accrued interest on top of the clean price.
- Tax years. A holding that spans April 2027 is taxed at the 2026 to 2027 rates for part of its life and the higher 2027 to 2028 rates after.
- Inflation. Both options pay fixed sums, so neither protects the buying power of the money if prices rise faster than the yield.
Step 3: compare what protects the money
Deposits with a UK-authorised bank, building society or credit union are protected by the Financial Services Compensation Scheme up to £120,000 per eligible person, per institution, a limit that rose on 1 December 2025. Banks that share a banking licence count as one institution, so the limit covers the total held across them (FSCS).
A gilt is a liability of the UK government. The DMO says the British government “has never failed to make interest payments or principal payments on gilts as they fall due” (DMO). If you hold gilts through a platform and the platform fails with a shortfall in the assets it holds for you, the FSCS can pay up to £85,000, but it does not pay for falls in market value (FSCS).
Step 4: compare access and price risk
A fixed-rate account’s terms set whether you can withdraw before the end of the term and at what cost, so read them before comparing. A gilt can be sold on any dealing day, but at the market price, which falls when yields rise and may be below what you paid. Held to maturity, a conventional gilt repays £100 per £100 nominal whatever happened to prices in between. If you might need the money early, the price risk on the gilt and the withdrawal terms on the account both belong in the comparison.
Step 5: check the wrapper
Inside a cash ISA, savings interest is tax-free, and inside a stocks and shares ISA so are gilt coupons and gains (GOV.UK). The low-coupon gilt’s tax edge exists only outside a wrapper. From 6 April 2027, though, under-65s will be able to pay only £12,000 a year into cash ISAs (Individual Savings Account (Amendment) (No. 2) Regulations 2026), which may push more cash savings into taxable accounts. We cover the change in the cash ISA rules from April 2027.
Gilts vs savings account: the breakeven formula
To find the savings rate that would match a gilt, divide the gilt’s after-tax yield by one minus your tax rate. In the example, a higher-rate taxpayer’s gilt yields 3.89% after tax; 3.89% ÷ 0.58 gives about 6.7%, the gross rate a fully taxed account would need to pay (6.70% in the table, which works from the unrounded yield). The same arithmetic works for any tax-free return, including Premium Bond prizes.
Two practical points. Compare over the same term, and compare annual figures with annual figures. Our guide to how to buy gilts explains where to find the yield and the costs, and bonds explained covers price risk in more depth.
