UK Bonds Explained: Gilts, Premium Bonds and Tax
There is a UK asset class with a tax quirk that makes it absurdly cheap for higher-rate earners. Almost nobody buys it. Hint: not Premium Bonds, though those are in here too.
UK bond types at a glance
| Bond type | Issuer | Tax on coupon | Capital gains |
|---|---|---|---|
| Conventional gilts | HM Treasury | Income tax (PSA applies) | CGT exempt |
| Index-linked gilts | HM Treasury | Income tax (PSA applies) | CGT exempt |
| Treasury bills | HM Treasury | Income tax (PSA applies) | CGT exempt |
| Premium Bonds | NS&I | No coupon - prizes tax-free | No gain |
| Corporate bonds | Companies | Income tax (PSA applies) | CGT applies |
The CGT exemption on gilts is the UK fixed-income market's quietest tax break.
Key takeaways
UK government gilts are among the safest investments available. Conventional gilts pay a fixed coupon, while index-linked gilts adjust for inflation using RPI.
Premium Bonds pay no interest. Instead your money enters a monthly prize draw with a 3.80% annual prize fund rate and a one-in-21,000 chance per £1 bond of winning each month.
Gilt coupons are taxable income, but capital gains on gilts are completely exempt from CGT. This makes deeply discounted gilts attractive for higher-rate taxpayers.
Gilt yields act as a barometer for investor confidence. Rising yields signal that markets are demanding more compensation to lend to the government, often reflecting inflation fears or fiscal concern.