Lock the 4.94% Gilt, Not the 4.85% Cash Fix — After Tax, the Gilt Pays 4.74% and the Cash Pays 2.91%

For a higher-rate taxpayer, tax is where fixed cash quietly dies. The Personal Savings Allowance is £500 for higher-rate savers, unchanged for 2026/27 — and at 4.52%, the best no-bonus easy-access account breaches it with just £11,062 on deposit, as our Savings Interest and Tax guide sets out. Once the allowance is gone, every pound of interest above it is taxed at 40%.

A 4.85% cash bond becomes 2.91% after tax. A low-coupon gilt at a 4.94% redemption yield splits its return into a small taxable coupon and a large tax-free capital gain — roughly 4.74% after tax for a 40% taxpayer. That is 1.8 percentage points a year, every year, on the same capital and the same credit risk.

The reason is structural, not a quirk of the moment. Cash interest is taxed as income at your marginal rate. Gilt capital gains are taxed at zero. The higher your tax band and the larger your balance, the wider the gap grows. On £50,000, the gilt keeps about £900 more in year one, and roughly £12,000 more over a decade once compounding does its work. One of these numbers beats the Bank's 3.2% inflation forecast. The other does not.

Fixed cash is protected by the Financial Services Compensation Scheme up to £120,000 per banking licence — a genuinely valuable safety net. But understand what it insures. FSCS pays out if the bank fails. It does nothing about inflation, and nothing about tax.

A gilt held to maturity pays exactly what it says on the tin. The UK government has never defaulted on a gilt in the modern era, and the security is the state's own taxing power — not a levy on the surviving banks. You buy through the DMO's retail service or a platform, and you are lending to the same institution that prints the currency it owes you.

That distinction matters because the risks to your savings right now are not bank failures. They are a Bank of England that three MPC members want to hike, an energy-cap shock pushing inflation toward 3%, and a tax system that takes 40p in every pound of interest above a £500 allowance. The Bank of England's July minutes said the Committee stands ready to raise rates if the Iran conflict feeds into wages and prices. A cash fix protects you from the risk you can insure against. A gilt protects you from the risks that are actually on the table.

Gains on gilts are exempt from Capital Gains Tax under section 115 of TCGA 1992. That is not a loophole; it is the entire reason gilts beat cash for anyone paying higher-rate tax on interest.

The trick is to buy a low-coupon gilt below its £100 face value. Most of its return then arrives as capital gain — the price climbing back to £100 at maturity — rather than as taxable coupon. Take the 0.5% Treasury Gilt 2061, the classic example: it trades far below par, so the annual coupon is tiny and the overwhelming majority of your return is the rise back to £100, paid tax-free. A 0.5% coupon gilt at a roughly 4.9% redemption yield pays a small taxable coupon and delivers the rest tax-free. Only the coupon is taxed.

The catch is that you must hold to maturity to capture that gain. Sell early and the price swings are all yours. That is the trade: give up liquidity, keep nearly all of the yield. For a decade-horizon pot, it is the closest thing the UK tax code offers to a free lunch.

Inside an ISA the advantage disappears, which is why the How to Buy UK Gilts guide treats the ISA wrapper and the CGT exemption as two separate tools: use the ISA first, then put surplus cash into low-coupon gilts outside it. For a higher-rate saver with the ISA maxed and the PSA gone, that ordering is worth close to two percentage points a year.

The case for cash leans on the 17 September meeting: if the Bank hikes, easy-access rates rise and a fixed gilt 'locks you in'. It sounds clever until you look at the numbers.

A quarter-point hike knocks roughly 2% off the price of a 10-year gilt — but only if you sell. Hold to maturity and the price move is irrelevant; you are paid the full yield you locked. Meanwhile a 4.85% one-year cash fix is just as locked as any gilt, and it locks you into an after-tax return below forecast inflation. Our BoE rate-cycle explainer tracks the full repricing.

The 10-year has traded in a tight band between 4.88% and 5.03% for the past fortnight, as the daily yield curve shows, while markets wait for July's CPI print due 19 August.

The market is not panicking; it is waiting. That is precisely the environment where locking a real, mostly tax-free yield is the disciplined move. The bet you make with cash is that inflation surprises lower and rates keep climbing fast enough to outrun the tax and inflation drag. The gilt makes the simpler bet: that a 4.94% government-guaranteed yield beats whatever the Bank does next.

Put £50,000 through both machines and the gap stops being theoretical.

The cash route. £50,000 in a 4.85% one-year fix earns £2,425 gross. A higher-rate taxpayer with the £500 PSA already spent pays 40% on the lot: £970 in tax, leaving £1,455 — a 2.91% after-tax yield. If the Bank's 3.2% year-end inflation forecast lands, the real return is negative before you even consider that the fix matures and must be repriced in twelve months' time.

The gilt route. £50,000 in a low-coupon gilt at a 4.94% redemption yield earns about £2,470 gross. Because most of that is tax-free capital gain, the tax bill is limited to the small 0.5% coupon: £250 taxed at 40% is £100, leaving about £2,370 — a 4.74% after-tax yield, comfortably above forecast inflation.

The difference is roughly £915 in year one. Compounded over ten years, it is about £12,000 — the price of choosing the 'safe' label over the safe maths. Both routes are ultimately backed by the British state in one form or another. Only one of them is taxed like an investment rather than like income. For the current best cash rates to compare against, see the /savings hub.

Be honest about the gilt's risks. If you need the money before maturity, you sell at the market price, and a 10-year gilt can be down 2% on a single hawkish headline. If inflation runs at the Bank's 4.5% worst case, even 4.94% is only a thin real return. And if you buy a high-coupon gilt, the CGT advantage shrinks because more of the return is taxable coupon.

That is why cash still has a job. Your emergency fund, money you need within two years, and the £120,000 FSCS-protected core of a cautious saver's wealth all belong in cash. The Best Savings Accounts guide and Fixed Rate Bonds guide show where those balances should sit.

But money you can genuinely lock away for five to ten years should not be losing to tax and inflation in a 4.85% fix when a government-guaranteed gilt pays 4.94% mostly tax-free. A 'safe' option that loses purchasing power every single year is not safety. It is a slow, well-insured loss.