Table of contents
The cost of leaving it
I sold a position in January and left the proceeds sitting in the account. Thirty thousand pounds, no plan for it, and I checked the interest line four months later expecting something small. It was zero. Not a poor rate. Nothing at all, because that particular account pays interest only if you opt into a product I had never been shown.
Bank Rate was 3.75% at the time, held there by the Monetary Policy Committee at its meeting ending 17 June 2026. Thirty thousand pounds earning nothing for a year, against a rate you could get for filling in a form, is £1,125. That is the number that made me actually read the options rather than assume they were all roughly the same thing.
They are not roughly the same thing. A savings account, a cash ISA, uninvested broker cash, a money market fund and a gilt differ on two axes that matter more than the headline rate: how the return is taxed, and what happens if the firm holding your money fails. Those two differences can be worth more than the entire gap between a good savings rate and a bad one.
The four places cash sits
Here is the shape of the field before any arithmetic. The yields move constantly, so treat the yield column as a description of behaviour rather than a quote.
The ISA allowance is £20,000 across all ISA types for the 2026 to 2027 tax year, per GOV.UK. For a lot of people that allowance is the whole answer and the rest of this page is academic. The tax arithmetic below only starts to bite on money you cannot fit inside a wrapper.
The allowances that govern the taxable pile are on GOV.UK: a personal savings allowance of £1,000 at basic rate, £500 at higher rate and zero at additional rate. There is also a starting rate for savings of up to £5,000 which reduces by £1 for every £1 of other income above the personal allowance, and vanishes entirely once other income reaches £17,570. If you are earning a normal salary, the starting rate is already gone and the personal savings allowance is the only shelter you have.
Notice how quickly £500 disappears. At 3.75%, a higher rate taxpayer uses up the entire allowance on about £13,300 of savings. Every pound of interest after that is taxed at 40%.
Why gilts are taxed differently
This is the part that is genuinely worth knowing, and it is a rule of legislation rather than a loophole or a trick of product design.
A gilt pays a fixed coupon and redeems at £100 per £100 nominal on a fixed date. The coupon is taxable as income in the ordinary way. The capital element is not, because section 115(1) of the Taxation of Chargeable Gains Act 1992 says that a gain accruing on the disposal of gilt-edged securities shall not be a chargeable gain. HMRC's Capital Gains Manual dates the current position precisely, stating at CG54900 that since 2 July 1986 all disposals of gilt-edged securities have been exempt from capital gains tax.
Now put that together with a gilt issued years ago at a low coupon. When Bank Rate rose, the price of those gilts fell, because nobody pays £100 for a bond paying 0.25% when new issues pay far more. The gilt now trades well below par and drifts back up to £100 as maturity approaches. Almost all of your return arrives as that price movement, and almost none of it arrives as coupon.
The return has been converted from income into capital. Income is taxed at 40% or 45%. Capital, on a gilt, is taxed at nothing.
The obvious objection is that HMRC has a rule for exactly this sort of thing. Buy a bond at a discount and the deeply discounted securities regime can tax the profit as income rather than leaving it as a capital gain. It does not reach a conventional gilt. Section 432(1) of ITTOIA 2005 lists what is not a deeply discounted security, and paragraph (b) of that list is gilt-edged securities that are not strips. The exclusion is explicit, and the carve-out for strips is the detail to watch: a gilt strip sits outside the exclusion and is treated differently.
One more piece of friction that nobody mentions until you meet it. The accrued income scheme apportions coupon interest between buyer and seller when a bond changes hands mid-period, and it applies to you above a threshold. HMRC's manual at SAIM4210 describes the exclusion under section 639 of ITA 2007 for individuals whose total nominal holdings never exceed £5,000 in the tax year or the one before. The test is on nominal value, so a holding bought at a discount still counts at face value. Anyone parking a serious cash balance in gilts is above that line and has some apportionment to do at self assessment.
Real examples of the low-coupon type exist on HMRC's own list of gilts exempt from capital gains tax, which names securities including 0¼% Treasury Gilt 2031 and 0⅛% Treasury Gilt 2032. I am not quoting a live price for any of them. The Debt Management Office publishes the authoritative reference prices and its data service blocked automated access when I checked, and a gilt price from a secondary source is exactly the kind of number that should not go on a page like this. The worked example below therefore uses a stated assumed price, which you should replace with the real one from your broker's dealing screen.
What each one nets you
Take a gilt with a 0.25% coupon and two years left to run, and assume you can buy it at £93.50 per £100 nominal. That price is an assumption, not a quote. Buy £100,000 nominal and it costs £93,500.
Over the two years you collect £250 of coupon a year, so £500 in total, and that is taxable income. At maturity the Treasury pays you £100,000. The difference between £100,000 and the £93,500 you paid is £6,500, and under section 115 that £6,500 is not a chargeable gain. Gross return £7,000, of which £6,500 is untaxed regardless of your band.
Assume the personal savings allowance is already used up by other interest, which for anyone with a meaningful cash balance it will be. The question then is what a savings account would have to pay, gross, to leave you with the same money after tax. Simple interest, no compounding, so the arithmetic stays visible.
The gilt itself yields about 3.74% a year gross on the £93,500 outlay. A higher rate taxpayer would need a savings account paying 6.06% to end up in the same place. Nothing in the easy access market is paying anywhere near that while Bank Rate is 3.75%, and that gap is the entire point of the structure.
Working one row through, so you can check it. At 40%, the £500 of coupon costs you £200 in tax and the £6,500 gain costs nothing, so you keep £6,800. To net £6,800 from a taxable savings account you need £11,333 gross, because £11,333 less 40% is £6,800. Spread £11,333 over two years on a £93,500 balance and the rate is 6.06%.
At basic rate the advantage narrows sharply, to a required 4.61%, which is a rate a decent savings account can plausibly reach. At additional rate the required rate goes to 6.59% and the gilt is in a class of its own. The lower your tax band, the less this is worth doing, and a basic rate taxpayer with an unused ISA allowance should probably stop reading here and use the ISA.
Four things can break the arithmetic. The gilt has to be held to maturity, since selling early means taking whatever the market price is that day, and it can be below what you paid. Dealing charges eat into a small position, so check what your broker charges for a bond trade rather than assuming it matches the share commission. The tax exemption applies to the capital element only, and a high-coupon gilt gives you far less of that benefit. And an ISA or SIPP removes the whole advantage by removing the tax the exemption was saving you from.
That last one is worth dwelling on, because it is the most common mistake. There is no reason to hold a low-coupon gilt inside a cash ISA to save capital gains tax. There was no capital gains tax to save. Inside a wrapper, pick on yield and convenience alone.
Three different protections
Almost every article on this subject says the money is FSCS protected and leaves it there. There are three separate protections in play and they cover different events at different limits.
The first is deposit protection. Money in a bank, building society or credit union is covered by FSCS up to £120,000 per eligible person per firm, a limit that took effect on 1 December 2025 and is published on the FSCS compensation limits page. The same page sets out protection for certain qualifying temporary high balances up to £1.4 million for six months from when the amount was first deposited, which is the provision that matters if you have just sold a house. The limit is per firm rather than per brand, and several high street names can share one banking licence, so two accounts at what look like different banks can collapse into one £120,000 allowance.
The second is investment protection, and this is the one people apply to their broker cash while quoting the deposit number. FSCS covers investments up to £85,000 per eligible person per firm for failures after 1 April 2019. The distinction that matters is what triggers it. FSCS says it may be able to protect you where a provider goes out of business and there is a shortfall in the money or assets it was holding for you. It also states plainly on its investments page that it cannot accept claims for poor investment performance. Your broker going under is covered. Your holding going down is not.
The third is the protection on a money market fund, and the honest answer is that there is no deposit guarantee behind it at all. A fund is an investment. If the fund falls in value, no compensation scheme makes you whole, because nothing has failed. The relevant safeguard is the ring-fencing of the assets and the £85,000 investment limit if the firm around it collapses, and neither of those is what a saver means by protected.
Brokers vary in how clearly they say this. Trading 212 documents its cash ISA rate as Bank Rate less a tracking margin on its rate tracker page, which gives the example of a 4.25% base rate and a 0.15% margin producing 4.10% AER, with interest compounding daily and paid monthly. Lightyear is blunter about the structure, stating in its help centre that the funds held in your Lightyear account are not equivalent to a bank deposit. Our Lightyear review and our Trading 212 review cover how each account behaves more broadly.
The EU picture differs and the difference is not cosmetic. On the same Lightyear page, the European entity explains that funds are protected by the Investor Protection Sectoral Fund up to €20,000 across all your multi-currency balances, and that they are not covered by the Deposit Guarantee Sectoral Fund because that scheme only covers bank deposits. Twenty thousand euro of investor protection is a different proposition from £120,000 of deposit protection, and a reader holding a house deposit should know which one they are relying on.
What a money market fund is
A money market fund holds short-dated debt: treasury bills, commercial paper, bank deposits and similar instruments, chosen so the portfolio turns over quickly and stays close to par. The yield tends to track short-term money market rates, so it moves roughly with Bank Rate, and the fund's ongoing charge comes out of that before you see it.
The regulatory split worth knowing is between short-term and standard funds. A short-term money market fund runs to a maximum weighted average maturity of 60 days and a weighted average life of 120 days. A standard fund is allowed six months and twelve months respectively, aiming at a slightly higher return by holding longer paper. The FCA sets out the framework and the fund categories in its consultation on updating the regime for money market funds. If you are using a fund as a cash substitute, the short-term category is the one built for that job.
I am not naming specific funds with yields and charges on this page. The factsheets I pulled were image-based documents that I could not read reliably, and an ongoing charges figure quoted from a comparison site rather than the manager's own factsheet is not good enough for a page people will act on. Find the fund on your platform, open the factsheet or the key information document, and read the ongoing charge and the fund type off the manager's own document.
The thing to hold onto is that the price can move. These funds are built to be stable and the low volatility structures operate inside a tight collar around par, but stable is not fixed and a fund is not a deposit. Calling one a cash equivalent without that qualification is where most of the bad advice on this topic starts.
Matching product to horizon
Horizon settles most of this before tax does. An emergency fund has an unknown call date, which rules out anything with a maturity you have to wait for or a settlement period you have to sit through. A gilt is a poor emergency fund even though it is tradeable, because the day you need it may be a day its price is down.
Money with a known date behaves differently. A house deposit due in eighteen months can be matched to a gilt redeeming just before it, and the price risk between now and then stops mattering because you are holding to maturity and the redemption amount is fixed. That matching is the real argument for gilts on a known-date liability, and the tax exemption is a bonus on top.
Dry powder between investments is the awkward middle. You want same-day access for the trade you have not decided on yet, which points at broker cash or a money market fund rather than anything with a fixed term, and it means accepting a lower return for the option to move. Check what your broker actually pays on uninvested cash before assuming the convenience is free, because on at least one of my accounts the answer was zero.
This page is general information and not financial, investment or tax advice. Tax treatment depends on your individual circumstances and can change. Gilts and money market funds can fall in value and are not deposits. Every rate here was checked on 20 July 2026 and will have moved since. Check the sources before you act.
Frequently asked questions
Are gilts really free of capital gains tax?
Does the discount on a gilt get taxed as income instead?
Is my cash at a broker covered by FSCS up to £120,000?
Can a money market fund lose money?
Does the gilt tax advantage work inside an ISA?
What is the personal savings allowance in 2026 to 2027?
Do I have to worry about the accrued income scheme?
Related reading
If you are moving cash between platforms to chase a rate, our guide on transferring a broker account covers what breaks in the process. Withholding tax on US holdings is a separate leak and is dealt with in the W-8BEN guide. How we check the numbers on these pages is set out in our review methodology.
