Bonds Are Paying 5% Again — Here's How UK Investors Should Actually Buy Them

Bond yields move inversely to prices. When the BoE was cutting rates from 5.25% in August 2023 to 3.75% by December 2025, gilt prices rose — handing holders capital gains on top of coupon income. See <a href="/posts/gilts-guide-uk-government-gilts-explained-how-they-work-types-yields-and-how-to">our detailed gilts guide</a> for more details. But the rate-cutting cycle has stalled. The Bank of England MPC held at 3.75% on 19 March 2026, and markets are now pricing in possible rate hikes this year due to energy price inflation from the Middle East crisis.

This creates a rare window. If you buy a 10-year gilt yielding 4.68% today and rates do rise, you'll suffer short-term paper losses — but you'll still collect 4.68% annually for a decade. If rates fall (as many forecasters still expect once the energy shock fades), gilt prices rise and you pocket a capital gain too. For more on the BoE's latest decision, see our rate decision analysis.

The yield curve tells a story. Long-term gilt yields have compressed from 4.69% in September to 4.43% in February — the market was expecting further rate cuts. That trend may reverse if inflation reaccelerates. Either way, locking in yields above 4% represents genuine value by any historical standard.

A gilt is a UK government bond. The British government has never defaulted on a gilt payment. You can buy them in denominations as small as one penny, and they pay semi-annual coupons.

There are two types. Conventional gilts pay a fixed coupon — say 3.25% on the 3¼% Treasury Gilt 2033. Index-linked gilts adjust both coupon and principal for RPI inflation, protecting your purchasing power. If you believe inflation will stay elevated, index-linked gilts are worth considering despite their lower headline yields. Our gilts hub has live yield data and a full breakdown of the gilt market.

The critical tax advantage: gilts are exempt from Capital Gains Tax. The CGT annual exempt amount has been slashed to just £3,000 for 2025/26 — down from £12,300 three years ago. With CGT rates at 18% or 24%, this exemption makes gilts more attractive relative to corporate bonds and equities than at any point in recent history.

Coupon income from gilts is taxable as savings income under the income tax bands — basic rate taxpayers get a £1,000 personal savings allowance, higher rate taxpayers get £500. But if you hold gilts inside a stocks and shares ISA or SIPP, both coupon and capital gains are tax-free. See <a href="/posts/isa-comparison-best-stocks-shares-isa-platforms-uk-202526-fees-features-and-who-each-one-is-best-for">stocks and shares ISA platform comparison</a> for more details.

Three routes exist for UK retail investors.

1. Through a stockbroker or platform. Hargreaves Lansdown, AJ Bell, and interactive investor all offer gilt trading. You search by maturity date, check the yield-to-maturity, and buy at the market price. Dealing charges typically run £5-£12 per trade. This is the simplest route. For platform comparisons, see our investing hub.

2. Through the DMO's Purchase and Sale Service. The Debt Management Office lets approved investors buy gilts directly — no platform fees, no annual charges. You need to register with Computershare (the gilt registrar). The catch: it's slower than a platform and there's no ISA wrapper, so you'll owe income tax on coupons.

3. Through a bond fund or ETF. If you want diversified exposure without picking individual gilts, funds like the Vanguard UK Government Bond Index Fund or iShares Core UK Gilts ETF (IGLT) hold baskets of gilts across maturities. Annual charges run 0.07%-0.15%. The trade-off: you never hold to maturity, so you're permanently exposed to price movements.

For most investors, buying individual gilts through a platform inside an ISA is the optimal route. You know exactly what yield you're getting, you choose your maturity date, and you pay zero tax.

UK investment-grade corporate bonds are currently yielding 4.5% to 5.9% — a meaningful premium over gilts. Names like United Utilities (5.625%), Vodafone (5.9%), and Wessex Water (5.75%) offer yields that rival equity dividend income with lower volatility.

The spread over gilts — the extra yield for taking credit risk — has compressed to multi-decade tights. That's the market saying corporate balance sheets are strong. It's also the market saying you're not being paid much for the risk of default.

Most retail investors shouldn't buy individual corporate bonds. Minimum dealing sizes are often £1,000-£10,000 face value, liquidity is thin, and you need to assess credit risk. Instead, consider a corporate bond fund. The Vanguard UK Investment Grade Bond Index Fund holds hundreds of issuers and charges 0.12% annually.

One caveat: corporate bonds are subject to Capital Gains Tax, unlike gilts. With the £3,000 annual exemption, this matters if you're holding outside a tax wrapper. For a full rundown on sheltering investment returns, see our tax-efficient investing guide.

This is the decision that trips up most investors.

An individual gilt held to maturity gives you certainty. Buy a 4.5% gilt maturing in 2031, hold it five years, and you know exactly what you'll receive. No surprises. No fund manager decisions. The yield-to-maturity is your return, period.

A bond fund never matures. As bonds in the fund reach maturity, the manager reinvests in new ones. If interest rates rise, the fund's price drops — and unlike an individual bond, you can't just wait for maturity to get your money back at par. Conversely, if rates fall sharply, a bond fund captures rolling capital gains that an individual bond buyer misses.

The rule of thumb: use individual gilts for capital you need back on a specific date (e.g., a house deposit in 3 years). Use bond funds for long-term portfolio allocation where you want broad exposure and are comfortable with price volatility.

Target-maturity bond ETFs are a relatively new hybrid. iShares iBonds ETFs hold corporate bonds maturing in a specific year (say 2028), then return your capital. They combine the diversification of a fund with the certainty of a maturity date. Worth investigating if you want corporate bond exposure with a defined endpoint. For more on the debate between cash and market exposure, our savings hub compares the alternatives.

The traditional 60/40 portfolio — 60% equities, 40% bonds — looked ridiculous when gilts yielded 0.5%. It looks rational again at 4.5%+.

For UK investors in their 40s or 50s approaching retirement, shifting 20-40% of a pension into gilts or bond funds locks in income and reduces portfolio volatility. A £200,000 SIPP allocated 30% to gilts yielding 4.5% generates £2,700 a year in tax-free income — and you can draw down the equity portion during market dips without selling at a loss. Our pension calculator can model different allocation scenarios.

Younger investors might hold 10-20% in bonds as a stabiliser, or skip them entirely in favour of equities. There's no single right answer. But the argument that "bonds are dead" — a consensus view from 2021 — is itself dead. With yields at decade highs, bonds earn their place.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.