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Bonds Explained — Gilts, Corporate Bonds, Premium Bonds and More

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The word "bond" covers several very different financial products — from government debt traded on global markets to the lottery-style Premium Bonds sold by NS&I. What they share is a fixed-income nature: you lend money and expect to get it back, usually with interest. Here is a clear guide to the main types and how they work in the UK.

What is a bond?

At its core, a bond is a loan. When a government or company needs to raise money, it can issue bonds to investors instead of going to a bank. The bond specifies:

• Face value (principal): The amount the borrower will repay at maturity
• Coupon: The annual interest rate paid to the bondholder (e.g. 4%)
• Maturity date: When the principal is repaid
• Price: What you actually pay to buy the bond in the market (can be above or below face value)

Example: A £1,000 gilt with a 4% coupon pays £40/year in interest. If interest rates in the market rise to 5%, the existing gilt becomes less attractive — its price falls until its yield (£40 ÷ new lower price) matches the market rate.

UK government bonds (gilts)

Gilts are bonds issued by the UK government through the Debt Management Office. They are considered among the safest investments in the world — the UK government has never defaulted on its debt. Gilts are traded on financial markets and come in varying maturities: short (under 7 years), medium (7–15 years) and long (over 15 years).

Index-linked gilts adjust both the coupon and principal in line with the Retail Prices Index (RPI), providing inflation protection.

Corporate bonds

Companies issue bonds to raise money for expansion, acquisitions or refinancing. Corporate bonds pay higher interest than gilts to compensate for the additional risk — the company could default. They are rated by credit agencies such as Moody's and S&P:

Category	Credit rating	Risk level	Typical yield
Investment grade	AAA to BBB−	Lower	Gilt + 0.5–2%
High yield ("junk")	BB+ and below	Higher	Gilt + 3–8%+

Most UK retail investors access corporate bonds through bond funds rather than buying individual bonds, which require large minimum investments and specialist knowledge.

Fixed-rate savings bonds

Despite the name, these are not the same as investment bonds. Fixed-rate savings bonds are straightforward savings accounts offered by banks and building societies that lock your money away for a fixed term (typically 1–5 years) in exchange for a guaranteed interest rate. They are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per authorised institution.

In 2026, competitive 1-year fixed-rate bonds are offering around 4.0–4.5%, making them attractive compared to easy-access accounts. The tradeoff is you cannot access your money during the fixed term without a penalty or losing interest.

Premium Bonds

Premium Bonds are issued by NS&I (National Savings and Investments) and are unique to the UK. Instead of paying interest, your money is entered into a monthly prize draw:

• You can hold between £25 and £50,000
• The prize fund rate is currently around 4.40% annually
• Prizes range from £25 to £1 million, drawn monthly
• All prizes are completely tax-free
• Your capital is 100% safe — backed by HM Treasury
• You can withdraw your money at any time

The 4.40% prize fund rate sounds competitive, but it is an average — actual returns depend on luck. Statistically, a holder with £50,000 can expect to win around £180 per month, but this is not guaranteed.

NS&I savings bonds

NS&I also offers Guaranteed Income Bonds and Guaranteed Growth Bonds — fixed-term products backed by the government, paying a set interest rate. These are separate from Premium Bonds and pay actual interest. NS&I rates tend to be competitive when the government wants to raise funds from retail savers.

Investment bonds (insurance bonds)

A different product entirely — investment bonds are life insurance policies that hold investments (funds) inside a wrapper. They have specific tax treatment:

• Up to 5% of the original investment can be withdrawn each year without an immediate tax charge (deferred to surrender or maturity)
• Gains are subject to income tax (not CGT) when eventually taken
• They can be assigned to a lower-rate taxpayer to reduce the tax on gains

Investment bonds are complex and should only be considered with professional financial advice.

How bonds are taxed in the UK

Bond type	Income (coupons/interest)	Capital gains
UK gilts	Income tax at marginal rate	CGT exempt
Corporate bonds (qualifying)	Income tax at marginal rate	CGT exempt
Corporate bonds (non-qualifying)	Income tax at marginal rate	CGT applies
Fixed-rate savings bonds	Income tax at marginal rate	No capital gain
Premium Bonds	Tax-free prizes	No capital gain
Any bond inside an ISA	Tax-free	Tax-free

Interest from bonds counts towards your Personal Savings Allowance — £1,000 tax-free for basic rate taxpayers, £500 for higher rate taxpayers, and nothing for additional rate taxpayers. Above that, interest is taxed at your marginal income tax rate.

Bonds in a portfolio

Traditionally, bonds play a defensive role in a portfolio — providing income, reducing volatility and acting as a counterweight to equities. When stock markets fall sharply, government bonds often rise in value (a "flight to safety"). However, the bond market selloff of 2022 reminded investors that bonds are not risk-free, particularly when inflation and interest rates rise rapidly.

For most UK investors, bonds are best accessed through:

• Bond index funds — low-cost, diversified exposure to hundreds of bonds
• Gilt ETFs — track UK government bond indices
• Multi-asset funds — blend equities and bonds automatically