How to Maximise Short-Term Savings with Premium Bonds, Gilts, and Savings Accounts

How each option is taxed

A gilt is a loan to the UK government. Its price is quoted per £100 of nominal, the amount the government pays back on a set date called the redemption date. A gilt bought below £100 and held to redemption makes a gain. Gains on gilts aren't chargeable to Capital Gains Tax, and the gain isn't taxed as income either. The coupon is paid every six months and counts as savings income. This guide covers ordinary fixed-coupon gilts. Gilt strips, which split a gilt into separate interest and capital parts, are taxed differently.

Savings interest has its own tax-free allowances on top of your Personal Allowance. The Personal Savings Allowance makes some interest tax-free, and how much depends on your band (see the table below). Your band depends on your total income: £50,271 to £125,140 is higher rate and anything above that is additional rate. Scottish taxpayers pay the same tax on savings interest as the rest of the UK.

There's also the starting rate for savings, worth up to £5,000 of tax-free interest. You only get it if your other income, such as wages and pensions, is under £17,570. It shrinks by £1 for every £1 of that income above the £12,570 Personal Allowance.

Banks don't deduct tax from interest. If your interest is £10,000 or less, HMRC usually collects the tax through your tax code. Above that, it goes on a Self Assessment return.

Which tax rates apply

From 6 April 2027, the tax on savings income rises by 2 percentage points in every band. The Personal Savings Allowance and the starting rate for savings stay the same, and the change applies across the UK.

Money needed in a year or two earns most of its interest after that date. A one-year account opened in autumn 2026 pays out in autumn 2027, so the examples use the 2027–28 rates.

What each option leaves you after tax

Say you have £20,000 that you'll need in a year or so. Moneyfacts' weekly savings roundup reported top rates of 5.00% for easy-access accounts and easy-access cash ISAs on 24 September 2026, and just over 5% for 1-year fixed bonds. NS&I's Premium Bond prize fund rate is 4.35%.

• An easy-access account or a 1-year fixed-rate account paying 5.0%: £1,000 of interest.
• A cash ISA paying 5.0%: £1,000 of tax-free interest.
• Premium Bonds at NS&I's prize fund rate of 4.35%: £870 on average across all bonds. Prizes are random, and £20,000 of bonds wins £725 in a typical year. In 8 years out of 10 it wins between £425 and £1,225 (see Premium Bonds below).
• The 0⅛% Treasury Gilt 2028 (TN28), which pays a 0.125% coupon and redeems at £100 on 31 January 2028. At a gross redemption yield of 4.333%, from a broker quote on 28 September 2026, £20,000 returns about £866.60 a year. Only about £26.43 of that is coupon. The rest is the tax-free rise towards £100.

The gross redemption yield is the whole return to redemption, coupons plus the rise to £100, as a yearly rate before tax. Quotes for TN28 moved between about 4.27% (YieldSmart, 25 September 2026) and 4.37% (Dividend Data, 24 September 2026) over a few days, so treat its figures as a snapshot. At 4.333% the clean price, the quoted price before adding the interest built up since the last coupon, works out at about £94.59. All the gilt figures are before dealing costs and assume TN28 is kept to 31 January 2028.

Assume this is your only savings interest. Here's what each option leaves after a year's tax at the 2027–28 rates.

For a basic rate taxpayer, all the interest fits inside the £1,000 allowance, so nothing is taxed and the highest headline rate (the advertised rate before tax) leaves the most.

A higher rate taxpayer pays 42% on the taxable account's interest above £500. That's £500 taxed, costing £210 and leaving £790. The gilt's coupon fits inside the allowance, so it keeps all £866.60. The cash ISA keeps all £1,000. Premium Bonds' typical £725 is less than the taxable account.

An additional rate taxpayer has no allowance, so the taxable account's whole £1,000 is taxed at 47%. That costs £470 and leaves £530. On the gilt only the £26.43 coupon is taxed, costing £12.42 and leaving £854.18.

If your allowance is already used up

If other savings already use your Personal Savings Allowance, every extra pound of interest is taxed at your full rate, which widens the gaps.

In this version the gilt leaves more than the taxable accounts in every band, and the cash ISA leaves more than everything else.

A bigger sum: £50,000

At 5%, £50,000 earns £2,500, which goes past the allowance in every band. Only £20,000 fits in a cash ISA in 2026–27, and only if none of that year's ISA allowance has been used. The rows that use one put the other £30,000 elsewhere. The same rates as above apply, with no other savings interest.

• A 5% savings account: £2,500 of interest.
• A 5% cash ISA for £20,000, plus the other £30,000 in a 5% savings account: £1,000 tax-free and £1,500 taxable.
• A 5% cash ISA for £20,000, plus £30,000 in TN28: £1,000 tax-free, and £1,299.90 from the gilt, of which £39.64 is coupon.
• £50,000 in TN28: £2,166.50, of which £66.07 is coupon.
• £50,000 of Premium Bonds, the maximum: £1,900 in a typical year, and between £1,350 and £2,725 in 8 years out of 10.

A basic rate taxpayer pays 22% on the £1,500 of savings interest above the allowance, which costs £330. With the cash ISA taking £20,000, only £500 is over the allowance, so the tax falls to £110. That mix leaves the most.

For higher and additional rate taxpayers, the cash ISA plus the gilt leaves the most, because only the gilt's small coupon is taxed. An additional rate taxpayer keeps £2,281.27 that way, against £1,325 with everything in a savings account.

The example assumes the extra interest doesn't take you into a higher tax band. The lower cash ISA limit for under-65s from 6 April 2027 only caps new payments. Money already in a cash ISA stays there, tax-free.

What the figures point to

These are the results of the £20,000 example, at late September 2026 rates. Different rates change the order.

How to compare a tax-free return with a taxed one

You can turn any tax-free rate into the taxed rate that would leave you the same amount. Divide the tax-free rate by one minus your tax rate.

At the 2027–28 rates, a 4.35% tax-free return matches about 5.58% taxed at 22%, 7.5% at 42% and 8.21% at 47%. This only applies to interest above your allowances. Interest inside the allowance is already tax-free, so compare the headline rates directly.

Getting your money out, limits and risks

Easy-access savings accounts

The rate can change at any time, up or down, so the £1,000 in the example isn't fixed. The top rates often come with conditions. When the FCA compares accounts that pay less in a period with a withdrawal, it shows the lower rate.

Fixed-rate savings accounts

Rates vary a lot between banks. On the same dates as the top rates above, Marcus's 1-year Fixed Term Saver paid 4.30% AER, according to the rate-comparison site DepositScout. AER, the annual equivalent rate, is the yearly rate including any interest earned on interest.

When the interest is taxed depends on the account's terms. HMRC taxes interest when it's paid or made available to you. If the account credits interest each year and you can reach it, even with a penalty, each year's interest is taxed that year. If the account doesn't let you touch anything until the end, all the interest is taxed in the year it matures.

That timing matters for a 2-year account. Say a basic rate taxpayer puts £20,000 in a 2-year fixed account at 5%. Credited yearly, the interest is £1,000 in the first year and £1,050 in the second. The first year's is covered by the allowance, and only £50 of the second year's is taxed, costing £11.

Premium Bonds

Premium Bonds are issued by National Savings and Investments (NS&I), which is backed by HM Treasury, so the money you put in is repaid in full. They pay no interest. Instead each bond is entered into a monthly prize draw. Prizes are free of income tax and Capital Gains Tax, and they don't use up your Personal Savings Allowance. NS&I announced on 18 August 2026 that its prize fund rate would rise to 4.35% from the September 2026 draw. It says the rate, prizes and odds can change at any time.

The 4.35% is the average across all bonds, and a handful of very large prizes pulls it up. So most holders win less than 4.35% in a year. Holding more bonds evens out the luck, and the typical return gets closer to the average, but it stays below it even at the £50,000 maximum. The figures below come from NS&I's prize table for the September 2026 draw, used for all 12 draws, in a simulation of 200,000 years for each holding.

A lucky year can be well above 4.35%, and an unlucky one well below. You always get back the same number of pounds you put in, but if prices have risen in the meantime, those pounds buy less.

For worked examples by amount held and tax band, and for children, pensioners and Universal Credit, see who Premium Bonds suit, and who they don't.

Gilts

The government has never failed to pay the interest or the capital on a gilt. You can buy gilts through a stockbroker, a bank or the Debt Management Office's own service.

The coupon is what decides the tax. When a low-coupon gilt such as TN28 is bought below £100, most of its return comes as the tax-free rise to £100 at redemption. With a higher coupon, more of the return is taxable interest, so the gilt is taxed more like a savings account.

The price moves every day with interest rates, so the yield you buy at only holds if you keep the gilt until its redemption date. A gilt that redeems on or before the date you need the money doesn't have to be sold early. Selling early doesn't always lose money, because the price could have risen, but it gives up the certainty of the £100 at redemption. Any gain is still tax-free.

The Accrued Income Scheme applies when a gilt is bought or sold between coupon dates. Part of the price is then treated as interest built up since the last coupon. The seller pays income tax on that part, and the buyer gets relief for it against the next coupon. With a 0.125% coupon the amounts are small. The scheme doesn't apply if the nominal value of all the gilts and bonds you hold stays at £5,000 or less in the tax year and the one before. HMRC's HS343 helpsheet has the details.

Cash ISAs

Cash ISAs come in easy-access and fixed-rate versions, with the same trade-offs as the accounts above. Putting withdrawn money back in the same tax year without using more allowance only works if the ISA is flexible, and your provider can tell you whether it is. Gilts can also be held in a stocks and shares ISA, where the coupon is tax-free too.

When to get professional help

Which option fits depends on when you need the money, how sure that date is, your other savings and your income. A regulated financial adviser can look at your situation. Get professional help too if your income is near £100,000, where the Personal Allowance starts to shrink. The same goes for trusts or living abroad.

Conclusion

Your tax band decides most of this. For a basic rate taxpayer whose interest fits inside the £1,000 allowance, tax changes nothing, so the highest rate leaves the most. Easy-access keeps the money reachable if the date might move, and a fixed rate locks in the return if it won't.

Once interest is taxed, because you pay higher or additional rate or have used your allowance, the tax-free options leave more. At the same rate, a cash ISA leaves at least as much as a savings account. The limits are the £20,000 ISA allowance and, from 6 April 2027, £12,000 a year in cash for under-65s. A low-coupon gilt held to redemption usually leaves more than a taxed account at a similar rate, before dealing costs. Selling it early means taking that day's price.

In the example, Premium Bonds' typical return is below both the cash ISA and the gilt in every band. The money is repaid in full, you can take it out at any time, and a lucky year can beat everything.

The rates here are from September 2026 and will change, but the method carries over. Work out what each option leaves after your own tax, then weigh that against how sure you are of the date and how quickly you might need the money.