THE war in the Middle East has added around £12 billion to the UK’s national interest bill as Gilt yields rise, experts warn, as they call it “a war tax on every UK taxpayer”.
The UK’s 10-year Gilt yield is rising again as the war in Iran escalated this week with oil prices still going up.
Higher Gilt yields matter for the Government’s borrowing bill and reduce the Chancellor’s room for tax cuts or spending promises, experts say – and that every 0.1% rise adds around £2 billion a year to the national interest bill.
At the start of the war it was 4.23% – and it has in three weeks risen to over 4.8%. This means the war has added around £12 billion to the UK’s national interest bill.
But it could improve annuity rates, the percentage used to calculate the annual income paid from a pension pot, and increase the level of guaranteed income available to retirees.
The war shows no sign of abating, with US President Donald Trump standing firm and Israel President Benjamin Netanyahu targeting Iranian gas fields.
Gulf countries overnight again came under attack from drones and missiles fired by Iran.
A war tax on every UK taxpayer
Dariusz Karpowicz, Director at Doncaster-based Albion Financial Advice, said he expects 10-year Gilts to break 5%.
He added: “Gilts up from 4.23% to over 4.8% in three weeks. That is the bond market telling you the war in Iran is now a UK household problem. Every 0.1% rise adds around £2 billion a year to the national interest bill, so this move alone has wiped out most of the Treasury’s breathing room.
“For homeowners, Gilt yields set the floor for mortgage pricing. Higher yields, higher rates, bigger monthly payments. If energy costs keep climbing and inflation stays stubborn, 5% on the 10-year is next. Do not assume this settles quickly.”
Samuel Mather-Holgate, Managing Director & IFA at Swindon-based Mather and Murray Financial, said gas prices are spiralling out of control.
He added: “With the latest attacks on both Iranian and Qatari natural gas facilities it looks more likely that the government will step in on energy costs as the commodity soared over 20% yesterday alone.
“That means more government borrowing and higher inflation- also higher Gilt rates which feed through into what you’re paying on your mortgage. The joys of Trump’s illegal attack on a sovereign country keep coming.”
Awful news for the government
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said mortgage pricing will rise.
She added: “The rise in the 10-year Gilt yield is not a technical market wobble but a warning that investors are beginning to demand more compensation for holding sterling debt in a far more inflationary and fiscally fragile environment. The escalation in Iran matters because it threatens higher energy prices, tighter supply chains, rising food costs, and therefore a broader repricing of inflation risk across the whole curve.
“The immediate consequence is that the Government’s borrowing costs rise, refinancing becomes more expensive, and the fiscal position deteriorates further. A rise from 4.23% to 4.76% adds roughly £5.3 million per year in interest for every £1 billion of new 10-year borrowing, while also increasing refinancing costs as existing debt rolls over at higher yields.
“Also, a higher Gilt yields feed through into mortgage pricing, corporate borrowing, pension scheme valuations. They also expose how vulnerable an over-indebted system is once bond markets start to demand a higher return.”
Steven Greenall, Protection Advisor at Dunmow-based Protect & Lend, did point out that pensioners could benefit from the higher Gilt yields.
He added: “Awful news for the government as every 0.1% rise in Gilt yields increases the interest bill by almost £2 billion per year. However if you are a pensioner relying on Gilt yields for income or are considering buying an annuity you are quids in. As annuities are priced off them, it brings higher incomes.”
For the government, this is a fiscal disaster
But Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, called it a “war tax”.
He added: “The jump in UK 10-year Gilt yields to 4.8%, the highest rate since January 2025, is a ‘war tax’ on every UK taxpayer as the market prices in the threat to global energy supplies from the war in Iran. This surge forces up mortgage rates and corporate borrowing costs, chilling any chance of economic growth of an already stagnant economy.
“For the government, this is a fiscal disaster, effectively wiping out the Treasury’s headroom for tax cuts or public spending. Additionally, the war-driven spike in energy prices increases the cost of inflation-linked debt, creating a double hit to the public purse.
“Looking ahead, yields are tethered to oil prices. If the Strait of Hormuz remains contested, 5% is the next psychological target. However, if de-escalation occurs, yields could quickly retreat toward the 4.2% registered in February before the war started.”
Photo by Nadia Sitova on Unsplash.
