Pillar Guide · Updated June 2026
UK Bonds & Gilts Tax Guide 2026/27
Bonds and gilts are loans you make to a government or company in return for regular interest and your capital back at maturity. The way they are taxed in the UK is not obvious: the interest is taxable savings income set against your Personal Savings Allowance, but the capital gain on a gilt is completely exempt from Capital Gains Tax. This 2026/27 guide explains how gilts, corporate bonds, bond funds and Premium Bonds are taxed, how the starting rate for savings can help, and works a full example for a higher-rate investor.
What Are Bonds and Gilts?
A bond is a tradable loan. You lend a fixed sum, the issuer pays you a fixed rate of interest called the coupon, and at the end of the term you get your capital back at the par value, usually GBP 100 per bond. A gilt is simply a bond issued by the UK government, considered very low risk because the government is unlikely to default.
Bonds trade on the open market, so their price moves above and below par depending on interest rates. If you buy a gilt for GBP 95 and hold it to maturity, you receive GBP 100 back, a GBP 5 capital gain on top of the coupons. As we will see, that gain on a gilt is tax-free, which is the single most important point in this guide.
How Bond Income Is Taxed
The coupon you receive is savings income. It is set against your Personal Savings Allowance (PSA) first, and anything above that is taxed at your marginal rate.
| Taxpayer | PSA (tax-free) | Rate above PSA |
|---|---|---|
| Basic rate | GBP 1,000 | 20% |
| Higher rate | GBP 500 | 40% |
| Additional rate | GBP 0 | 45% |
People with low earned income may also use the starting rate for savings, a zero per cent band of up to GBP 5,000 that sits on top of the PSA. It is reduced pound for pound by non-savings income above the GBP 12,570 personal allowance, so it mainly helps low-income savers and some early retirees. See the savings interest tax guide for the full mechanics.
Why Gilts Are CGT-Exempt
Gilts are specifically exempt from Capital Gains Tax by statute. Any gain from buying a gilt below par and holding it to maturity, or selling it at a higher price, is completely tax-free. With the CGT annual exempt amount cut to just GBP 3,000 for 2026/27 and rates of 18 per cent and 24 per cent, this exemption is increasingly valuable.
This creates a planning opportunity. A low-coupon gilt trading well below par delivers most of its total return as a tax-free capital gain rather than as taxable coupon income. For a higher or additional-rate taxpayer whose PSA is only GBP 500 or nil, that can sharply improve the after-tax yield compared with a savings account paying the same gross rate.
Corporate Bonds and Bond Funds
The interest on a corporate bond is taxed exactly like a gilt coupon: savings income against your PSA. For Capital Gains Tax, most ordinary sterling corporate bonds are qualifying corporate bondsand are also CGT-exempt. The exceptions are bonds that can convert into shares or are denominated in a foreign currency, which can be subject to CGT, so always confirm a bond's status before assuming the gain is tax-free.
Bond funds are taxed differently again. A fund that holds mainly interest- bearing assets pays out an interest distribution taxed as savings income, while a fund classed as an equity fund pays dividend distributions taxed under the dividend rules. Crucially, gains on units in a bond fund are not CGT-exempt in the way direct gilts are. Holding bond funds inside an ISA removes both the income tax and the CGT concern entirely.
Worked Example: A Higher-Rate Gilt Investor
Priya is a higher-rate taxpayer with a PSA of GBP 500. She buys 1,000 units of a low-coupon gilt at GBP 95 each (GBP 95,000) that pays a 1 per cent coupon and matures at par, GBP 100. Figures are illustrative.
- Coupon income: 1 per cent of GBP 100,000 par value = GBP 1,000 per year.
- Taxable coupon: GBP 1,000 less the GBP 500 PSA = GBP 500 taxable at 40 per cent = GBP 200 tax.
- Capital gain at maturity: GBP 100,000 par less GBP 95,000 cost = GBP 5,000.
- CGT on the gain: GBP 0, because gilts are exempt from Capital Gains Tax.
Priya keeps the entire GBP 5,000 capital gain tax-free and pays only GBP 200 on the coupon. The same GBP 5,000 gain on a non-exempt asset, after the GBP 3,000 annual exempt amount, would have cost her 24 per cent on GBP 2,000, or GBP 480. Model your own figures with the savings calculator and the capital gains tax calculator.
Common Mistakes
- Assuming all bond gains are tax-free. Only gilts and qualifying corporate bonds are CGT-exempt; bond fund units and convertible or foreign-currency bonds may not be.
- Forgetting that the coupon is still taxable even when the capital gain is exempt.
- Overlooking the starting rate for savings, which can shelter up to GBP 5,000 of coupon income for low earners.
- Comparing Premium Bonds on a headline rate without checking the current NS&I prize fund rate and the chance of winning nothing.
- Holding bonds outside an ISA when an ISA wrapper would remove the tax on the coupon for a higher-rate investor.