With the Bank of England holding rates at 3.75%, fixed deposits are finally paying decent interest again. But for investors willing to go one step further, GBP gilts and qualifying corporate bonds offer something a savings account can never match: capital returns that are entirely free of Capital Gains Tax — a structural advantage that grows significantly at higher tax rates.
Key Thoughts
Most conversations about saving in the UK start and end with deposits. They are simple, safe, and now — after years of near-zero rates — finally paying something meaningful. But for British investors who pay tax at 40% or 45%, the after-tax return on a deposit is considerably less impressive than the headline rate suggests.
This is where GBP-denominated gilts and qualifying corporate bonds enter the picture — not simply because they tend to yield more, but because of how that return is taxed. Understanding this distinction is one of the most underappreciated aspects of personal fixed income investing in the UK.
Rate Environment
At its meeting ending on 18 March 2026, the Bank of England's Monetary Policy Committee voted unanimously to hold the Bank Rate at 3.75%. Prior to the outbreak of conflict in the Middle East in late February, a cut to 3.50% had appeared likely. That consensus has now reversed: energy prices have surged roughly 40%, pushing UK CPI back to 3% and prompting some market participants to price in rate hikes rather than cuts later in 2026.
Gilt Screener
The table below shows a selection of UK gilts currently available to retail investors through major brokers, drawn from the Bondfish Bond Screener filtered for GBP government bonds. All carry the lowest possible credit risk and are non-callable.
| Bond | Yield % | Coupon % | Price | Tenor (yrs) | Credit | CGT on gain |
|---|---|---|---|---|---|---|
| United Kingdom 1.5% Jul 2026 | 3.51 | 1.50 | 99.43 | 0.28 | Very Low | 0% ✓ |
| United Kingdom 0.375% Oct 2026 | 3.78 | 0.38 | 98.22 | 0.54 | Very Low | 0% ✓ |
| United Kingdom 0.125% Jan 2028 | 3.92 | 0.13 | 93.44 | 1.81 | Very Low | 0% ✓ |
| United Kingdom 1.625% Oct 2028 | 3.99 | 1.63 | 94.35 | 2.54 | Very Low | 0% ✓ |
| United Kingdom 4.25% Dec 2027 | 4.03 | 4.25 | 100.35 | 1.66 | Very Low | 0% ✓ |
| United Kingdom 0.5% Jan 2029 | 4.03 | 0.50 | 90.70 | 2.82 | Very Low | 0% ✓ |
| United Kingdom 6% Dec 2028 | 4.04 | 6.00 | 104.90 | 2.67 | Very Low | 0% ✓ |
| United Kingdom 0.875% Oct 2029 | 4.05 | 0.88 | 89.63 | 3.54 | Very Low | 0% ✓ |
| United Kingdom 1.25% Jul 2027 | 4.08 | 1.25 | 96.49 | 1.28 | Very Low | 0% ✓ |
| United Kingdom 0.375% Oct 2030 | 4.09 | 0.38 | 84.77 | 4.54 | Very Low | 0% ✓ |
Source: Bondfish Bond Screener, March 2026. Highlighted rows are low-coupon discounted gilts particularly suited to higher-rate taxpayers seeking CGT-free capital appreciation.
There are currently plenty of gilts offering a yield at or above 4% per annum — and the highlighted low-coupon issues trade at meaningful discounts to their £100 redemption value, meaning the bulk of the return arrives as a CGT-free capital gain rather than taxable income.
Tax Advantage
The headline yield comparison between a deposit and a gilt can be misleading, because it ignores how the two returns are taxed differently. Both deposit interest and gilt coupon income are subject to Income Tax in the same way — through the Personal Savings Allowance and then at your marginal rate. But a gilt's price appreciation — the gain from buying below par and holding to redemption — is completely free of Capital Gains Tax for individual investors. This exemption has applied to gilts since 1986.
The same CGT exemption extends to most GBP-denominated corporate bonds, provided they qualify as Qualifying Corporate Bonds (QCBs) under HMRC rules. A corporate bond is a QCB if it is denominated in sterling with no foreign currency conversion clause and represents a normal commercial loan — which covers the great majority of plain-vanilla bonds issued by large UK and international companies. Investors should verify QCB status for any specific bond before relying on CGT-free treatment.
Crucially, this CGT exemption does not extend to bond funds or ETFs — even if every underlying holding is a gilt or QCB. For investors who care about tax efficiency, this is a compelling reason to hold individual bonds rather than bond funds.
Consider the UK 0.375% Oct 2030 gilt, currently priced at £84.77 per £100 of face value and maturing at £100 in approximately 4.5 years. To buy £10,000 of face value, an investor pays roughly £8,477 in cash. The total return has two components:
Now compare this to a 4.09% fixed deposit on the same £8,477 cash. Every penny of the deposit's return is taxable interest. The gilt investor pays income tax only on the small £37.50/yr coupon; the £1,523 capital gain is entirely tax-free.
Illustrative only. Simple interest used for the deposit comparison. Assumes PSA fully utilised elsewhere, no ISA wrapper, purchase at current clean price excluding accrued interest. Individual tax circumstances will vary. Not financial advice.
What Doesn't Qualify
Zero-coupon and deeply discounted bonds require care. Many fall under HMRC's Deeply Discounted Securities (DDS) rules, under which the discount at maturity is taxed as income at your marginal rate — not as a capital gain. Gilt strips are a clear example. The interaction between DDS and QCB rules is complex, and investors should verify the specific treatment of any individual instrument before relying on CGT-free status.
Foreign currency bonds — including EUR or USD bonds issued by British companies — are not QCBs, and price appreciation is subject to CGT at 18% or 24%.
Bond funds and ETFs are generally subject to CGT on price appreciation on disposal, with gains above the £3,000 annual exempt amount taxed at 18% (basic rate) or 24% (higher/additional rate). Most mainstream UK-listed bond ETFs are reporting funds and therefore within the CGT regime.
Practical Questions
Summary
For investors who prioritise simplicity and want government-backed protection on every pound, a competitive fixed-term deposit from an FSCS-protected bank remains a sound choice. Top 1-year rates are approaching 4.4% AER — a genuine real return above current inflation for the first time in years.
For investors paying tax at 40% or 45%, the after-tax case for low-coupon discounted gilts is compelling — particularly now, when many gilts trade at significant discounts to par following the rate rises of 2022–2024. The capital gain component of the total return is entirely tax-free, and the instrument carries the credit of the UK government. These bonds are available through any standard broker with no minimum investment beyond one gilt.
For most UK savers, a practical approach combines both: an FSCS-protected Cash ISA or easy-access account for reserves and short-term needs, and a ladder of discounted gilts or investment-grade QCBs for longer-term capital where the tax treatment makes a meaningful difference to the outcome.
The full universe of GBP gilts and corporate bonds — as well as bonds in USD, EUR, and other major currencies — can be searched and filtered on the Bondfish Bond Screener.
Search over 50,000 bonds — filter by currency, yield, maturity, credit quality, and broker availability. See which gilts are currently trading at a discount and calculate your yield to maturity.
Open Bond Screener at bondfish.com →For those looking to compare the latest fixed-term deposit rates across UK banks and building societies, current offers can be searched and found at depositscout.com.
