UK consumer prices rose 3.1% in the 12 months to August 2026, up from 2.9% in July, the Office for National Statistics reported on 16 September 2026; figures for September are due on 21 October. A real return is what is left after inflation, and at 3.1% a savings account paying 4% before tax leaves a higher-rate taxpayer who has used their allowance with less buying power at the end of the year than at the start. Index-linked gilts, the government’s inflation-linked bonds, pay more as prices rise. They are linked to the Retail Prices Index, which is due to take on the methods of CPIH from February 2030.
Where inflation stands
In August 2026 the Consumer Prices Index (CPI) rose 3.1% on a year earlier, CPIH, which adds owner-occupiers’ housing costs, rose 3.3%, and core CPI, which leaves out energy, food, alcohol and tobacco, rose 2.6%. Transport, particularly motor fuels, made the largest upward contribution to the rise in the annual rates. The Retail Prices Index (RPI) rose 3.4% (ONS).
The Bank of England held Bank Rate at 3.75% on 17 September 2026 and said CPI inflation “is likely to rise further over coming quarters” (Bank of England). Its next decision is due on 5 November 2026; we cover the outlook in the Bank of England’s November decision.
Real returns in one formula
To turn a return into a real return, divide one plus the after-tax return by one plus inflation, then subtract one. A return of 4% with inflation at 3.1% gives 1.04 ÷ 1.031, or a real return of about 0.87%. Tax comes first, because tax is charged on the whole of the interest, including the part that only keeps pace with prices.
The table applies that to a hypothetical savings account paying 4.00% gross, with inflation held at August’s 3.1% for a year. Taxed rows assume the Personal Savings Allowance is already used; savings rates are 20%, 40% and 45% in 2026 to 2027 and 22%, 42% and 47% from 6 April 2027 (HMRC).
| Tax position | After tax, 2026 to 2027 | Real return, 2026 to 2027 | After tax, 2027 to 2028 | Real return, 2027 to 2028 |
|---|---|---|---|---|
| No tax due | 4.00% | 0.87% | 4.00% | 0.87% |
| Basic rate | 3.20% | 0.10% | 3.12% | 0.02% |
| Higher rate | 2.40% | -0.68% | 2.32% | -0.76% |
| Additional rate | 2.20% | -0.87% | 2.12% | -0.95% |
Small annual gaps add up. If prices rose 3.1% a year for five years, £10,000 at the end would buy what about £8,584 buys today. Interest has to beat that erosion after tax before the saver is any better off.
How index-linked gilts work
Index-linked gilts are government bonds whose “semi-annual coupon payments and the principal repayment are adjusted in line with the UK Retail Prices Index (RPI) with a lag” (DMO). If the index falls, the payments can fall too. They are a large market: index-linked gilts totalled about £688.5bn at the end of 2025, 25.2% of the government’s wholesale debt, with an average maturity of 16.8 years (HM Treasury, Debt Management Report 2026 to 2027).
A hypothetical example shows the mechanics. Take £10,000 nominal of an index-linked gilt with a 0.125% coupon. If the relevant RPI has risen 10% by the time the gilt matures, the holder is repaid £11,000, and each coupon is paid on the uplifted amount, so the last ones are based on £11,000 rather than £10,000.
The price you pay sets the real yield: the return above RPI inflation if the gilt is held to maturity, before tax. A buyer who locks in a hypothetical real yield of 1.0% would, with RPI at August’s 3.4%, earn about 4.43% a year in cash terms, since 1.01 × 1.034 is about 1.0443. The Bank of England publishes daily real yield curves and implied inflation curves estimated from gilt prices (Bank of England).
The trade-off is price risk. Real yields move, and when they rise, index-linked gilt prices fall. Because many index-linked gilts are long-dated, those price swings can be large, and a holder who sells before maturity can lose money in cash terms even while inflation is high. The inflation protection is only complete for a holder who keeps the gilt to the end. Our cornerstone, bonds explained, covers duration.
RPI, CPIH and the 2030 change
The ONS says the RPI does not meet the standard for accredited official statistics but is still published because it is widely used in contracts (ONS). In 2020 the UK Statistics Authority and HM Treasury consulted on bringing the methods and data sources of CPIH into the RPI.
The outcome, published on 25 November 2020, was that the Chancellor would not consent to the change before the last of two specific index-linked gilts matured in 2030, and that the change “can legally and practically be made by UKSA in February 2030” (HM Treasury). Judicial review proceedings over aspects of the reform were dismissed on 1 September 2022. The ONS now describes the change as coming from 2030 at the earliest.
For holders, the effect is on the uplift after the change. HM Treasury expects RPI reform in 2030 to reduce RPI inflation (HM Treasury), so index-linked gilts maturing after 2030 will be uplifted by an index built on CPIH methods for those later years. In August 2026 the gap between the two measures was small: RPI 3.4% against CPIH 3.3%.
How index-linked gilts are taxed
- Coupons are savings income, taxed above the Personal Savings Allowance at the savings rates for the year (HMRC).
- Gains, including the inflation uplift on the principal at redemption, fall within the capital gains tax exemption for gilts (TCGA 1992, section 115).
- Accrued interest on index-linked gilts falls under the Accrued Income Scheme if your securities exceed £5,000 nominal on any day in the tax year or the year before (HMRC, HS343).
- Inside an ISA or pension, coupons and gains are free of tax.
How each option responds to inflation
| Holding | Link to inflation | What is fixed | Main inflation risk |
|---|---|---|---|
| Instant-access cash | None; the rate can change | The capital in pounds | The rate staying below inflation |
| Fixed-rate savings | None | The rate and capital for the term | Inflation rising above the fixed rate |
| Conventional gilt | None | The coupons and £100 at maturity | Inflation eroding fixed payments; price falls if sold early |
| Index-linked gilt | Coupons and principal follow RPI, with a lag | The real yield, if held to maturity | Price falls when real yields rise; RPI can fall; RPI reform from 2030 |
| Premium Bonds | None; the prize fund rate is variable | The capital in pounds | Prizes below inflation |
To buy either kind of gilt, see how to buy gilts. To compare a conventional gilt with a fixed-rate account after tax, see gilts or a savings account.
