The ladder designer applies a marginal tax rate to the rungs' coupon income, so this article shows what a stated band does to that income while the redemption-funded draw — a return of capital — is left untouched.
Which part of a ladder is taxed
A ladder produces two kinds of cash, and only one of them is taxable income. The coupons a rung pays while it runs are income, taxed as savings income. The draw the ladder is designed to pay is funded by each rung's redemption at par, which is a return of capital, not income. So an after-tax view of a ladder has to tax the coupons and leave the redemption alone. The bond ladder designer does exactly that: its tax band applies to the rungs' coupons, not to the redemption that funds the annual draw. Reading the two parts together is what makes an after-tax figure mean something: taxing the whole cash flow would understate what the ladder keeps and mistake capital for income.
The tax band on the ladder page
The ladder's tax control takes the reader's marginal rate on coupon income, offered across a set of bands. The band does not change the size of the ladder or the draw it funds; it changes what the coupons keep. Because a conventional gilt's redemption is capital, a higher band cannot shrink the redemption-funded draw — it only reduces the after-tax coupon that arrives beside it. That is why the ladder does not grow when a higher band is selected, and why reading the band as a dial that changes the whole ladder gets it wrong.
The gilt lists carry a similar figure in the net income (20%) column: the coupon per £100 after 20 per cent basic-rate income tax, the coupon less a fifth. It is a starting point rather than a personalised figure, because it fixes the rate at 20 per cent and assumes no allowance. The ladder's band generalises that idea to the rate a reader selects.
A band worked on stated income
The table is an illustration and not a quote from any gilt. It assumes a ladder whose rungs pay £2,000 a year of coupon income in total, and a redemption-funded draw of £9,000 a year, and applies three bands to the coupon. The £2,000 and £9,000 are illustrative inputs; the rates are the UK savings-income rates for the 2025/26 tax year as published by GOV.UK and HMRC.
| Band | Coupon income | Coupon after band | Draw (capital, untouched) | Total cash |
| Gross (none) | £2,000 | £2,000 | £9,000 | £11,000 |
| 20 per cent | £2,000 | £1,600 | £9,000 | £10,600 |
| 40 per cent | £2,000 | £1,200 | £9,000 | £10,200 |
| 45 per cent | £2,000 | £1,100 | £9,000 | £10,100 |
The coupon falls from £2,000 to £1,600 at 20 per cent, to £1,200 at 40, to £1,100 at 45. The £9,000 draw does not move at any band, because it is capital coming back, not income being taxed. The total cash is the after-tax coupon plus the untouched draw, which is £11,000 gross and £10,100 at the additional rate. The arithmetic is exact; the inputs are illustrative.
The draw and the coupon do different things
It is worth separating the two in a reader's mind. The draw is what the ladder is designed to pay each year, funded by maturing rungs; it is return of principal, so a marginal rate does not touch it. The coupon is what the still-running rungs pay while they run; it is income, so the band reduces it. A reader who wants to know what a ladder keeps after tax is asking about the coupon side, because that is the only part a band acts on. The draw itself is unaffected, and the ladder's shape is unaffected too.
- The draw is funded by redemption at par — a return of capital — and is not income-taxed.
- The coupon is savings income, and the band reduces it.
- A higher band changes what the coupons keep, not the size of the ladder.
- The net income (20%) column on the gilt list is the coupon after basic-rate tax, before allowances.
Allowances sit in front of the rate
The figures above apply the band to the whole coupon, before any allowance. In practice a reader's savings income is sheltered up to the personal savings allowance — £1,000 at the basic rate, £500 at the higher rate and nothing at the additional rate for 2025/26 — and the starting rate for savings can shelter up to a further £5,000 when other income is low. Those allowances cover all of a person's savings income, not only gilt coupons, so the after-tax figure a reader actually sees can be higher than the band alone would give. The post-tax yield page shows the net income and net redemption yield at a range of bands, so the after-tax columns can be read directly rather than worked by hand.
Background, not advice
This article explains how a chosen marginal rate applies to a ladder's coupon income while the redemption-funded draw is left untouched. It is general background, not investment, tax or legal advice for any reader's circumstances, and it is not a substitute for professional tax advice. The tax treatment described is the general position for a UK resident for the 2025/26 tax year, sourced from GOV.UK and HMRC; the figures above are illustrative and state their inputs, and the primary source for a real coupon or rate is the gilt's own record and GOV.UK.