What are premium bonds?
Premium bonds are offered by National Savings & Investments (NS&I) and pay tax-free ‘prizes’ instead of interest meaning what you receive is literally the luck of the draw. But the more £1 bonds you have, up to the maximum of £50,000 per person, the more you can expect to get a reasonably consistent cash-like return.
As they’re offered by the government-backed NS&I, there’s no risk to your capital. Plus, you can withdraw money at any time, with the online process taking around two working days.
Is it worth investing in premium bonds?
The return you receive from your premium bonds holding is not only determined by chance but is skewed by the large prizes awarded. A significant portion of the prize fund goes to the big winners – including two £1 million prizes each month alongside other big amounts – which means fewer smaller prizes of £25 and upwards that are more likely to be won.
The upshot is you're likely to receive less than the current prize fund rate of 3.6%, especially as a small premium bond holder, with say less than £1,000. The rate has already been cut a couple of times this year, and although the prizes are tax-free, returns lag behind interest rates on competitive savings accounts – even allowing for above average luck.
What’s the alternative to premium bonds and who should consider them?
As there’s no tax to pay on premium bonds, they might be more appealing to those likely to use up their personal savings allowance (PSA). This is the amount of interest you can earn on cash and certain investments in a tax year without paying tax.
Your PSA depends on your income tax rate:
| Income tax rate | Allowance |
| Basic rate taxpayer (20%) | Can earn £1,000 of interest in the 2025/26 tax year before paying tax |
| Higher rate taxpayer (40%) | Has a lower allowance of £500 |
| Additional rate taxpayer (45%) | Doesn't receive any PSA |
Find out more: What is the Personal Savings Allowance?
For example, if you're a basic rate taxpayer earning 4% interest on your savings, you’d need over £25,000 to exceed your PSA. Below that threshold, premium bonds offer no tax advantage.
There’s also the option of a Cash ISA to house up to £20,000 in savings each year. However, it’s often wiser to use your ISA allowance for higher risk, higher return assets through a Stocks & Shares ISA.
So, are premium bonds worth it?
If you’re likely to pay tax on your savings interest – particularly if you’re a higher or additional rate taxpayer – then premium bonds are worth considering. A premium bond return of 3% (assuming ‘average luck’ rather than the stated prize fund rate of 3.6%) translates to a gross interest rate of 5% for a higher rate taxpayer.
Still, it’s a low, below-inflation return unless you’re lucky. Non-taxpayers will likely do better with a competitive savings account, especially for smaller amounts.
Overall, there are pros and cons to premium bonds. They can certainly be more fun than a standard savings account with the anticipation of each month’s draw. But strip that away, and it’s just a case of sporadically earning interest on your money. The chances of winning a £1 million prize are substantially worse than winning the jackpot in the National Lottery – though at least you get your money back!
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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