Premium Bonds explained: odds, prizes and the tax position
Quick answer: Premium Bonds are a UK savings product run by NS&I that pays no interest — instead, each £1 bond is entered into a monthly prize draw.
Premium Bonds are a UK savings product run by NS&I that pays no interest — instead, each £1 bond is entered into a monthly prize draw. The capital is 100% backed by HM Treasury and prizes are tax-free, but returns are not guaranteed. This guide explains how the draw works, who they suit, and how they compare with a normal savings account.
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Primary source: https://www.nsandi.com/products/premium-bonds
How the prize draw works
Every £1 bond entered into the monthly draw has the same odds of winning a prize, regardless of when you bought it or how many you hold. A computer called ERNIE (Electronic Random Number Indicator Equipment) generates the winning numbers.
Bonds bought this month must be held for a full calendar month before they are first eligible — bonds bought in May enter the July draw.
Holdings can be checked online via the NS&I prize checker, on the NS&I app, by Alexa skill, or by post.
What 'prize-fund rate' actually means
The prize-fund rate is the total value of monthly prizes expressed as an annual percentage of all eligible bonds. It is a mean across every bondholder — your individual return will almost always differ.
Because the prize pool includes two £1 million jackpots and many large prizes, the mean is pulled upwards by a small number of very lucky holders. The median return for a typical small holder is much lower — often £0 in any given year on a small holding.
If guaranteed returns matter to you, a Cash ISA or fixed-rate savings account is more predictable. Premium Bonds suit savers who have already used their Personal Savings Allowance and value the tax-free nature of any prizes, or who simply enjoy the prize-draw element.
Tax treatment and eligibility
All Premium Bond prizes are paid free of UK Income Tax and Capital Gains Tax — they do not count towards your Personal Savings Allowance or starting rate for savings.
You can buy Premium Bonds from age 16 in your own name. Bonds for under-16s can be bought by parents, legal guardians or (since 2023) grandparents and great-grandparents.
The maximum holding is £50,000 per person. There is no maximum across a household — couples can hold £100,000 between them, each managing their own bonds.
How they compare with savings
Headline-for-headline: a 3.80% prize-fund rate is roughly equivalent (for a basic-rate taxpayer who has used the Personal Savings Allowance) to a 4.75% gross savings rate. For higher-rate taxpayers the equivalence is around 6.33%.
But this only applies to typical or above-typical luck. For small holdings the probability of winning anything at all in a year can be quite low — see our Premium Bonds probability calculator to model your specific situation.
Easy-access savings accounts pay a guaranteed interest rate (taxable). Cash ISAs pay tax-free interest up to the annual allowance. Both have FSCS protection up to £85,000 per banking licence.
Common questions
- Are Premium Bonds tax-free?
- Yes. Prizes are not subject to UK Income Tax or Capital Gains Tax, and they don't count towards your Personal Savings Allowance or dividend allowance. They are reportable for some other tax regimes (e.g. US persons should consult a specialist).
- Can I cash in Premium Bonds at any time?
- Yes. You can cash all or part of your holding any time via the NS&I website, app or by post. Repayments are normally credited within 3 working days.
- Are Premium Bonds protected by the FSCS?
- No — they are backed 100% by HM Treasury instead. This Treasury backing is generally regarded as equivalent to or stronger than FSCS cover, and there is no £85,000 cap.
- Should I move money from a savings account to Premium Bonds?
- The question turns on whether the tax-free nature of prizes outweighs the lack of guaranteed interest. If you've used your Personal Savings Allowance and are comfortable with the risk of winning nothing in a given year, the maths can favour Premium Bonds — but the median return for a small holding is often below the headline. Use the probability calculator below to model your own holding.