How gilts can help you pay less tax on savings interest

Governments have two main ways of raising cash to pay for public services. The first is to tax the population, which is generally unpopular. The second is to borrow, which is generally more popular, though comes with its own downsides. One way the UK Government borrows is to sell debt, and one way it does this is by issuing gilts.

These gilts – also known as UK government bonds – can act a lot like fixed savings accounts, particularly if the gilt is maturing within a couple of years. At the start, you put money in (to do this you buy the gilt, usually through an investment platform – more on the different pricing structures below). But, instead of the cash sitting with a bank, you are effectively lending it to the Government.

In return the Government promises to pay you regular interest while you hold the gilt. This is known as the "coupon" or "coupon rate" and will be listed prominently on all gilts. 

And, as you might expect, when the gilt reaches its maturity date, the Government pays back the lump sum it borrowed, which is £100 per gilt (though you might have paid less for it). So, you've your money back, likely plus a bit extra if you bought at a discount. And you also get the interest (coupon) you've made during the period you held the gilt.

Are gilts safe to invest in?

As gilts are issued by the UK Government, they are seen as safe. The UK Government has never yet defaulted on gilt repayments or coupon payments.

However, there is some risk. If the UK was to go bankrupt, then there's a chance the government of the day wouldn't have the cash to pay you back when your gilt matures. Though it's likely that if such a thing were to happen, we'd all have bigger problems anyway.

That said, like any savings account or investment, it's best not to put all your eggs in one basket. If you do choose to invest in gilts, for safety it should only form part of your savings strategy. If you're not sure what to do, or whether this is right for you, seek help from an independent financial adviser. 

To help you compare gilts to other savings accounts, we've built this calculator, which will give you an annualised rate of return on the gilt you're thinking of buying. Use gilt listings on Hargreaves Lansdown* or Interactive Investor's* sites to get the details you need to fill in (on the ii site, you'll need to switch from the bonds to the gilts tab). 

Note, the calculator doesn't factor in platform or trading fees, but you will pay them, so just bear that in mind if returns between the two are close.