The short version: A bond is basically a loan you make to a government or company. They pay you interest, and eventually pay back the original amount. It’s a way to invest with (usually) lower risk than shares.
How do they work?
You buy a bond for a set amount (the principal). The issuer pays you interest (the coupon) at regular intervals. On the maturity date, you get your principal back.
Government bonds in the UK are called gilts. They’re considered very safe because the government isn’t likely to default.
How are they taxed?
Interest from bonds counts as savings income and is taxed like bank interest. But if you sell a government gilt for a profit, that gain is tax free. Bonds held in an ISA are completely tax free.
Investment bonds are different
Investment bonds (the kind sold by insurance companies) have their own rules. Gains inside them are taxed at 20% automatically. You can withdraw up to 5% a year without extra tax.
Thinking about bonds for your portfolio? Let’s chat about the tax implications.
