Buy the Index-Linked Gilt, Not the 4.85% Fixed Bond — RPI Plus 1.9% Real Beats 2.91% After Tax

The index-linked gilt is priced in two parts that savings adverts never show you. You get the Bank of England's 10-year real spot rate of about 1.9% (20 August 2026), plus whatever RPI prints each month. July's RPI was 3.2%, so a linker held today pays roughly 5.1% nominal — more than any fixed bond on sale.

The direction is the story. CPI fell through the spring, bottomed at 2.6% in June, then turned back up to 2.9% in July. RPI never really calmed down — 4.1% in March, 3.0% in April, 3.2% now. A fixed bond pays you the same 4.85% no matter which way that line goes. The linker pays you more precisely when prices rise, which is the job you asked it to do.

That 1.9% figure is the Bank of England's 10-year real spot rate, not a marketing headline. It is the return you keep on top of whatever inflation prints, every year, until the gilt matures. A fixed bond is the reverse: the rate is fixed and the real return is whatever inflation leaves behind. One of these is a hedge; the other is a guess.

The word 'guaranteed' does heavy lifting in savings marketing, and almost none of it protects you from the thing that actually erodes your money. A 4.85% bond guarantees the interest rate. It does not guarantee what that interest will buy.

Take £50,000. In a 4.85% one-year fix you earn £2,425 gross. RPI at 3.2% eats £1,600 of purchasing power, leaving about £825 of real gain. A higher-rate taxpayer with the Personal Savings Allowance spent hands over £970 of that to HMRC, keeping £1,455 — below the £1,600 inflation took. The bond wins on paper and loses in reality.

Even a basic-rate taxpayer with their £1,000 allowance already used elsewhere nets £1,940 after 20% tax — a £340 real gain against 3.2% RPI. Strip out inflation and the 'guaranteed' bond barely keeps its head above water for anyone paying tax.

The Bank of England breakeven curve tells the same story. The market expects 3.28% inflation for ten years. A 4.85% bond held against 3.28% is 1.57% real before tax. No scenario makes that a good inflation hedge.

For a higher-rate saver the after-tax comparison is not close. The Personal Savings Allowance is £500 for higher-rate taxpayers and £0 for additional-rate, so most of a bond's interest is taxed at 40% or 45%. A 4.85% bond nets 2.91%.

An index-linked gilt flips the structure. The inflation uplift on the principal is a capital gain, and gains on gilts are exempt under section 115 of TCGA 1992. Only the small real coupon — a fraction of a percent — is taxable income. So the 3.2% RPI uplift arrives essentially tax-free, and so does the real appreciation. For the same higher-rate saver, the linker's 5.1% return is almost entirely retained, while the bond's 4.85% shrinks to 2.91%.

This is the gap the fixed-bond comparison table never shows, because it compares gross headline rates and pretends tax and inflation belong to a different conversation.

Be direct about the risk: index-linked gilts are not volatility-free. A 10-year linker has duration, and if real yields keep climbing — they have drifted higher through the summer — the price falls. A hawkish Bank of England in September, with Bank Rate at 3.75%, could push real yields up and hand you a paper loss.

Notice what a hike does not do. It does not erase your inflation linkage, which is the point of owning the asset. And the fixed bond is exposed to the same problem in mirror form: if the hike signals inflation is stickier than expected, the bond's 4.85% is frozen while prices keep climbing. The linker is the only one of the two that reprices up with inflation automatically. Hold it to maturity and the real yield you locked is yours regardless.

Ask what a September hike actually signals. A central bank does not raise rates into 2% inflation; it raises because inflation is sticky enough to demand a response. That is exactly the environment where a frozen 4.85% hurts most and an RPI-linked payout earns its keep. The price wobble on the way is the cost of the guarantee, not a flaw in the hedge.

Most UK index-linked gilts track RPI, not CPI, and they do so with a three-month lag. Purists say RPI is a discredited measure — it runs structurally above CPI, 3.2% versus 2.9% in July — and the lag means you are paid on an old inflation print. Both are true. For the person buying inflation protection, both are features, not bugs. You are paid the higher of the two indices, and the lag smooths month-to-month noise rather than amplifying it. The mechanics are laid out in our Index-Linked Gilts explainer.

The ONS publishes the two series side by side: CPI at 2.9% in July and RPI at 3.2%. The gap between them is not noise — it is structural, and the linker pays you on the higher number.

And if prices ever fell outright, the redemption is floored at £100 — you keep the real yield without the downside of negative indexation.

You buy linkers the same way as any gilt: through the DMO's purchase service, a broker, or a gilt fund. The wrapper decision matters more than the execution. Inside a SIPP or ISA the tax point is moot; outside, the CGT exemption is doing the work. Start at the gilts hub for the full mechanics and check the savings hub before you commit. The 17 August debate on conventional gilts versus fixed cash runs the same after-tax maths for nominal gilts if you want the parallel case.

Cost matters. Buying through the DMO's Purchase and Sale Service is cheapest for a single gilt held to maturity; a broker suits smaller sums and makes selling easier; a gilt fund or ETF pools the job but charges an ongoing fee and you lose the clean hold-to-maturity maths. If you are matching a known future expense, buy the individual gilt and stop trading it.