Short answer: a gilt ladder is a set of UK government bonds chosen so that one matures in each year you need money. Each gilt pays a known amount on a known date, so the income for those years does not depend on the stock market. Held outside a pension or ISA, gilts have one unusual advantage: the capital gain on a gilt is free of capital gains tax, and only the small coupon is taxed as interest — which is why low-coupon gilts bought below their face value are so popular with higher-rate taxpayers.
How one gilt works — the words in one example
A gilt is a loan to the UK government. Suppose you buy one today for £82.40 that:
- pays 50p a year per £100 — the coupon, fixed when the gilt was first issued;
- repays exactly £100 in five years — its maturity.
Everything you get back — five 50p payments plus the £17.60 gain from £82.40 to £100 — works out at about 4.5% a year. That single number is the yield (sometimes called the yield to maturity or YTM). The coupon is not your return; the yield is. Price and yield move opposite ways: if the gilt gets cheaper, the fixed £100 at the end is a bigger win, so the yield rises.
Why the split between coupon and gain matters: the 50p coupons are taxed as interest, but the £17.60 gain is completely tax-free — gilts are exempt from capital gains tax. So outside an ISA or pension, a gilt paying almost everything as gain keeps nearly the whole 4.5%, while a savings account paying 4.5% loses a chunk to income tax. The yield curve is simply this yield measured at every maturity — what lending to the government for 1, 5, 10 or 20 years pays today — and the Bank of England publishes it each weekday. (More terms: what the words mean.)
What a ladder is for
- The bridge before a pension starts — retiring at 60 with the state pension at 67, or before a pension can be touched at 55 (57 from April 2028).
- The first years of retirement, when a market fall does the most damage. A ladder covering five years lets the invested money ride out a bad start.
- A known cost you can see coming — school fees, a care plan, a mortgage ending.
It is the cash bucket idea with a fixed return: Money Horizon's bucket keeps some years of income in cash; a ladder locks in today's yields for those years instead.
What it pays today
Yields on 26 August 2026 (Bank of England): Bank Rate 3.75%, five-year gilts 4.53%, ten-year 5.09%, twenty-year 5.01%. A ladder paying £30,000 a year for five years costs about £132,400 today — £150,000 back over five years at an average yield of 4.2%. Because each rung is bought at today's price, the cost is fixed the day you buy; a savings account's rate can change every month.
| Year the money is needed | Yield | Cost today for £30,000 |
|---|---|---|
| 1 | 3.9% | £28,900 |
| 2 | 4.1% | £27,700 |
| 3 | 4.2% | £26,500 |
| 4 | 4.4% | £25,300 |
| 5 | 4.5% | £24,000 |
The tax point
Outside a pension or ISA, a savings account's interest is taxed as income — 40% for a higher-rate taxpayer above the £500 personal savings allowance. A gilt's return has two parts: the coupon, taxed the same way, and the gain from buying below £100 and being repaid £100 at maturity, which is exempt from capital gains tax for individuals. Across the five-year ladder above, a 0.5% coupon at 40% tax costs just 0.2 points: the 4.2% average yield keeps about 4.0% after tax, and a savings account would need to pay 6.7% before tax to match it (the same sum for the five-year rung alone: 4.5% keeps 4.3%, matched by a 7.2% savings rate). Inside a pension or ISA there is no tax either way, so the coupon does not matter and only the yield does.
Money Horizon's gilt ladder calculator takes the years, the amount, your tax rate and the coupon, prices each rung off the Bank of England curve, and shows the after-tax return and the savings rate that would match it. It never names a gilt: the list of gilts in issue, with coupons and maturity dates, is published by the Debt Management Office, and any UK platform that deals in shares can buy them.
Ladder, bond fund, money market fund or annuity?
- A bond fund holds hundreds of gilts and never matures, so its value moves with interest rates — 2022 showed how far. A ladder held to maturity does not care what rates do in between.
- A money market fund holds very short-term instruments and earns roughly SONIA (the overnight rate) less its charge. The rate floats day by day — good for money whose date is not fixed, but it cannot lock in today's yields the way a ladder does, and its interest is fully taxable.
- An annuity turns a lump sum into income for life; a level annuity at 65 pays about 6.8% of the purchase price a year in 2026, but the capital is gone. A ladder returns the capital on each rung and stops when it ends.
- A savings account is simpler and FSCS-protected to £85,000 per bank; it wins when rates are high and your tax rate is low.
Today's figures for all of these — Bank Rate, SONIA, the gilt curve, and every conventional gilt maturing within ten years with an indicative yield — are on What the market pays today, updated each weekday.
Questions people ask
Are gilts safe? They are obligations of the UK government, repaid at face value on the maturity date. The risk is in selling early, when the price depends on interest rates at the time.
Do I need a lot of money? No. Gilts trade in units of £100 nominal, and most platforms allow small purchases; dealing charges matter more on small amounts.
What is a low-coupon gilt? One issued when rates were near zero, so it pays almost no interest and trades well below £100. Nearly all its return is the tax-free gain at maturity — the best kind for a taxable account.
Can I hold gilts in an ISA or SIPP? Yes, and there they are tax-free anyway; a fund may be simpler there unless you want fixed dates.
Where do the yields in the calculator come from? The Bank of England's daily yield curve (Bank Rate, 5-, 10- and 20-year par yields), refreshed each weekday; the calculator shows the date it is using. Yields between those points are interpolated.