Making Cash Work Harder: Turning Idle Cash into a more Tax-Efficient Return…
Low interest rates can erode purchasing power, while higher deposit rates often come with a significant tax burden.
For many higher-rate taxpayers, cash held in bank accounts can be surprisingly inefficient.
Once 40% income tax is deducted, a 4% savings rate becomes just 2.4% after tax.
We've spent a lot of time over the past couple of years helping clients find more tax-efficient homes for their short-term cash to make their savings work harder.
One solution we've frequently recommended is the use of short-dated UK Government gilts.
A Real Example of the Opportunity
One of the gilts we've used with clients matures on in January 2028 and was available to purchase at 94.64.
In simple terms, an investor pays £94.64 today for a gilt that is due to be repaid at £100 on maturity.
This creates a gain of:
Purchase price: £94.64
Redemption value: £100.00
Capital uplift: £5.36
That equates to a return of:
5.66% over the holding period
or approximately:
3.93% per annum.
Most of this return comes from the difference between the purchase price and the redemption value. Gains on most UK gilts are exempt from Capital Gains Tax, making them particularly attractive for higher-rate taxpayers.
After our ongoing adviser charge of 0.25% per annum, for a higher-rate taxpayer paying 40% tax on savings interest, a taxable savings account would need to generate:
6.13% gross per annum to produce the same net return after tax and adviser charges.
That's because for every £1 of bank interest earned, only 60p is retained after 40% income tax.
This is often the moment when investors realise the difference between a headline interest rate and a genuinely attractive after-tax return.
Why We've Been Recommending This Strategy
This isn't about taking more investment risk or trying to beat the stock market.
For many clients, it's simply about making cash more efficient.
The attractions include:
UK Government-backed security
Known maturity date
Defined redemption value when held to maturity
Potentially superior after-tax returns compared with many savings accounts
Daily liquidity if circumstances change
Ongoing professional review and monitoring
A structure that can be particularly attractive for higher and additional-rate taxpayers
Of course, gilts are not suitable for everyone. Their value can rise and fall before maturity and individual circumstances will always determine whether they are appropriate. Professional advice should always be sought before investing.
The Tax Advantage
The real benefit is often not the headline return but how that return is taxed.
Bank accounts generally pay returns entirely as taxable interest.
Some, and definitely not all, Short-dated gilts, on the other hand, can generate much of their return through tax-free capital growth, allowing investors to keep more of what they earn.
For higher-rate taxpayers holding significant cash balances, this can make a meaningful difference to overall outcomes.
Could Your Cash Be Working Harder?
Many investors still have large sums sitting in bank accounts earning modest returns and creating unnecessary tax liabilities.
By reviewing available options, it may be possible to achieve a significantly better after-tax outcome without taking on more risk than necessary.
If you're a higher-rate taxpayer with surplus cash and would like to understand whether a gilt strategy could work for you, we'd be delighted to help.
Get in touch with our team for a no-obligation conversation and discover whether your savings could be working harder. A simple review could reveal opportunities to improve tax efficiency, increase your net return and make better use of your available capital.