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.
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 bonds and 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.
Premium Bonds
Premium Bonds from NS&I are a special case. They pay no guaranteed interest; instead each GBP 1 bond is entered into a monthly prize draw, and any prizes are completely tax-free. Prizes do not count towards your Personal Savings Allowance or any other allowance, and there is no Capital Gains Tax to worry about.
The catch is that returns are not guaranteed and depend on the prize fund rate, which NS&I changes from time to time. Some months you may win nothing. Always check the current NS&I rate and compare it against a tax-free Cash ISA before deciding, especially if you are a basic-rate taxpayer whose savings interest would be covered by the PSA anyway.
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.
The interest (coupon) you receive from gilts is taxable as savings income. It is set against your Personal Savings Allowance first: GBP 1,000 tax-free for a basic-rate taxpayer, GBP 500 for a higher-rate taxpayer and nil for an additional-rate taxpayer. Interest above the allowance is taxed at your marginal rate of 20 per cent, 40 per cent or 45 per cent. If your other taxable income is low you may also benefit from the starting rate for savings, which gives up to GBP 5,000 of savings interest at a zero rate, tapered away as non-savings income rises above the personal allowance.
Why are gilts exempt from Capital Gains Tax?
UK government gilts are specifically exempt from Capital Gains Tax by statute. If you buy a gilt below its GBP 100 par value and it rises towards par as it nears maturity, that capital uplift is completely tax-free. This makes low-coupon gilts trading below par particularly attractive to higher and additional-rate taxpayers: most of the return comes as a CGT-exempt capital gain rather than as taxable coupon income. The coupon itself remains taxable as savings income, but the price gain is not.
Are corporate bonds taxed the same way as gilts?
Not entirely. Like gilts, the interest on a corporate bond is taxable savings income set against your Personal Savings Allowance. For Capital Gains Tax, most ordinary sterling corporate bonds count as qualifying corporate bonds and are also exempt from CGT, like gilts. However, some bonds, such as those convertible into shares or denominated in a foreign currency, are not qualifying and can be subject to CGT. Always check whether a specific bond is a qualifying corporate bond before assuming the gain is tax-free.
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Are Premium Bonds prizes taxable?
No. Premium Bonds prizes from NS&I are completely tax-free and do not count towards your Personal Savings Allowance or any other allowance. There is no income tax and no Capital Gains Tax on a Premium Bonds win. The trade-off is that you earn no guaranteed interest: instead, each GBP 1 bond is entered into a monthly prize draw. The effective return depends on the prize fund rate, which NS&I changes periodically, so check the current NS&I rate before comparing Premium Bonds with a savings account.
Do I pay tax on bonds held inside an ISA?
No. Gilts, qualifying corporate bonds and bond funds held inside a Stocks and Shares ISA are completely free of income tax and Capital Gains Tax, and the interest does not count towards your Personal Savings Allowance. For higher and additional-rate taxpayers, whose savings allowance is only GBP 500 or nil, holding bonds inside an ISA can be a meaningful saving on the coupon income. The annual ISA allowance is GBP 20,000 for 2026/27, shared across all ISA types.
How do I report bond interest to HMRC?
Banks and brokers usually report savings interest to HMRC automatically, and for many people the tax is collected through an adjustment to their PAYE tax code. If you complete a Self Assessment return, you declare gilt and corporate bond coupon income in the savings interest section. Because gilts and qualifying corporate bonds are CGT-exempt, you generally do not need to report the capital gain on them. Keep your contract notes and coupon statements in case HMRC asks for evidence.
What is the starting rate for savings and can I use it on bond income?
The starting rate for savings is a zero per cent band of up to GBP 5,000 that applies to savings income, including bond coupons. It is reduced pound for pound by any non-savings income, such as salary or pension, above your GBP 12,570 personal allowance, so it is fully available only to people with very low earned income. Where it applies, you can receive up to GBP 5,000 of bond interest tax-free on top of your Personal Savings Allowance, making bonds attractive for low-income savers and some early retirees.
Are accrued income and the clean price relevant for tax?
Yes, under the accrued income scheme. When you buy or sell a bond between coupon dates, part of the price reflects interest that has built up since the last coupon. The scheme reallocates that accrued interest to the correct party for tax, so the seller is taxed on interest earned up to the sale date and the buyer gets relief for interest they effectively pre-paid. For most retail investors holding to maturity this has little effect, but active traders should be aware of it and may need to declare the adjustment.
Are gains on bond funds treated the same as gains on direct gilts?
No. Unlike a directly held gilt or qualifying corporate bond, units in a bond fund do not carry the statutory CGT exemption, so a gain when you sell or switch fund units can be liable to Capital Gains Tax after your annual exempt amount. The income distributions from a bond fund are usually taxed as savings income in the same way as a direct coupon. Holding bond funds inside an ISA or pension removes both the income tax and the CGT exposure.
Does the CGT annual exempt amount matter if I only hold gilts?
Not for the gilts themselves, since any gain on a gilt or qualifying corporate bond is exempt regardless of the annual exempt amount. It still matters if your wider portfolio includes other assets, such as shares or bond funds, because the GBP 3,000 annual exempt amount for 2026/27 is shared across all your non-exempt gains for the tax year. Keeping the gilt gain separate simply means it never uses up any of that allowance.
Disclaimer: This guide reflects 2026/27 UK rules. The Personal Savings Allowance, starting rate for savings, CGT annual exempt amount and the gilt CGT exemption can change at fiscal events, and the Premium Bonds prize rate changes periodically. Investing carries risk and bond prices can fall. This is general information, not personal advice; refer to gov.uk and NS&I for current figures and consider a regulated adviser.
