Index-Linked Gilts Explained: How UK Inflation-Protected Government Bonds Safeguard Your Purchasing Power

Index-linked gilts are UK government bonds whose coupon payments and principal repayment are adjusted in line with the Retail Prices Index (RPI). This means that both the income you receive and the amount you get back at maturity increase with inflation — providing a built-in hedge against rising prices.

Here is how the mechanism works in practice. Suppose you buy £1,000 nominal of an index-linked gilt with a 0.125% coupon. The coupon might look tiny compared to a conventional gilt yield — see the DMO for current gilt data (dmo.gov.uk), part of GOV.UKing 4% or more, but it is a real (after-inflation) yield. The actual cash payments you receive are the coupon multiplied by the cumulative RPI inflation since the gilt was first issued.

For example, if RPI has risen by 20% since the gilt was issued, your £1,000 nominal is effectively worth £1,200 for payment purposes. Your semi-annual coupon would be calculated on £1,200, not £1,000. When the gilt matures, you receive £1,200 back (the inflation-adjusted principal), plus the final coupon.

Crucially, index-linked gilts use RPI — not CPI or CPIH — as the inflation measure. RPI typically runs higher than CPI (currently 3.8% vs 3.0% in January 2026), which means index-linked gilt holders benefit from a more generous inflation adjustment. The government has considered switching to CPIH but has not done so for existing index-linked gilts.

The fundamental difference between conventional and index-linked gilts is how they handle inflation risk. A conventional gilt pays a fixed coupon and returns a fixed principal — meaning inflation erodes the real value of those payments over time. An index-linked gilt adjusts both payments for inflation, preserving your purchasing power.

Coupon rates: Conventional gilts have higher nominal coupons (reflecting both the real return and an inflation premium). Index-linked gilts have much lower coupons — often below 1% — because the coupon represents a real yield above inflation. The total return comes from the coupon plus the inflation uplift.

Price behaviour: Conventional gilt prices are sensitive to changes in nominal interest rate expectations. Index-linked gilt prices are sensitive to changes in real interest rate expectations and inflation expectations. When inflation expectations rise, index-linked gilts tend to outperform conventional gilts, and vice versa.

Tax treatment: Like conventional gilts, index-linked gilts are exempt from capital gains tax (CGT). However, the inflation uplift on the coupon payments is subject to income tax. The inflation uplift on the principal at maturity is also tax-free (as it counts as a capital gain on a gilt). This tax asymmetry can make index-linked gilts particularly attractive for higher-rate taxpayers.

Maturity range: The UK government issues index-linked gilts across a wide range of maturities, from short-dated (a few years) to ultra-long (over 50 years). Pension funds are major buyers of long-dated index-linked gilts because their liabilities — pension payments — are also linked to inflation.

Related reading: See our investing hub · How to Buy UK Government Gilts · Gilt Yields Explained

Index-linked gilts are not the right choice for every investor, but they serve important roles in several scenarios.

Inflation protection: If you believe inflation will remain elevated or rise further, index-linked gilts provide direct protection. With CPI at 3.0% and RPI at 3.8% in January 2026, real returns on cash savings are razor-thin or negative. An index-linked gilt's return automatically adjusts upward if inflation persists.

Retirement income: For retirees or those approaching retirement, index-linked gilts offer a way to secure income that keeps pace with the cost of living. Unlike a fixed annuity, which loses purchasing power each year to inflation, an index-linked gilt's payments grow in real terms.

Portfolio diversification: Index-linked gilts often behave differently from equities and conventional bonds, making them useful for diversification. In periods of unexpected inflation, equities may struggle while index-linked gilts benefit from the inflation uplift.

Risk considerations: Index-linked gilts are not risk-free in all scenarios. If inflation falls or turns negative (deflation), your cash payments will decrease. If real interest rates rise sharply, the market price of existing index-linked gilts will fall — which matters if you may need to sell before maturity. And the RPI indexation lag (typically three or eight months, depending on the gilt's issue date) means payments do not adjust instantly to current inflation.

The breakeven inflation rate — the inflation rate at which an index-linked gilt and a conventional gilt of the same maturity give the same return — is a key metric. If actual inflation exceeds the breakeven rate, index-linked gilts outperform. If inflation undershoots, conventional gilts win.

Retail investors have several routes to buy index-linked gilts:

Investment platforms: Most UK investment platforms — including Hargreaves Lansdown, AJ Bell, interactive investor and Vanguard — allow you to buy and sell gilts (both conventional and index-linked) on the secondary market. You search for the specific gilt by its name (e.g. '0⅛% Index-linked Treasury Gilt 2039'), place a buy order and the gilt is held in your account. Platform dealing fees apply.

DMO Purchase and Sale Service: The UK Debt Management Office runs a service that allows approved investors to buy gilts directly. This is administered by Computershare Investor Services PLC. It is a viable route for buy-and-hold investors, though it is less convenient than a platform for active trading.

Gilt funds and ETFs: If you prefer not to pick individual gilts, several index-linked gilt funds and ETFs are available. These provide diversified exposure across multiple maturities. Popular options include iShares UK Index Linked Gilts ETF and Vanguard UK Inflation-Linked Gilt Index Fund. Fund-based approaches are simpler but involve ongoing fund charges.

Within an ISA or SIPP: Gilts can be held within a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP), sheltering the income from tax entirely. Since gilt interest is subject to income tax but capital gains are CGT-exempt, holding gilts in a tax wrapper removes the main tax drag.

Minimum investment: You can buy gilts in units as small as one penny nominal, though platforms typically set practical minimums. There is no need to buy in round lots of £1,000.

Several factors make index-linked gilts particularly relevant in early 2026.

The Bank of England has cut Bank Rate from 5.25%, set by the Bank of England (bankofengland.co.uk/monetary-policy/the-interest-rate) to 3.75% over the past 18 months, but inflation remains above target. CPI at 3.0% (down from 3.4% in December 2025) is heading in the right direction, but the Bank's own forecasts suggest it may take until 2027 to sustainably hit 2%. During this period, index-linked gilts offer a hedge against the risk that disinflation stalls.

The Spring Statement on 3 March 2026 could affect gilt markets. Any significant fiscal announcements — changes to borrowing plans, spending commitments or tax policy — will move both conventional and index-linked gilt yields. The 2022 mini-Budget demonstrated how quickly gilt markets can react to fiscal surprises.

RPI reform remains a long-term consideration. The government has stated its intention to align RPI with CPIH from 2030, which would reduce the inflation measure used for index-linked gilt indexation. For existing index-linked gilts maturing before 2030, this is irrelevant. For longer-dated issues, it could reduce future inflation adjustments. The Supreme Court ruled in 2022 that the government has the legal authority to make this change.

This article is for informational purposes only and does not constitute regulated financial advice. The value of investments can go down as well as up, and you may get back less than you invest. For personalised advice, consult a qualified financial adviser.

Sources: DMO gilt information, Bank of England yield data.