Premium Bonds: Are They Worth It as a Tax-Free Investment?
By calculatemysalary.co.uk Editorial Team
Explore if premium bonds are a valuable tax-free investment option in the UK and discover their benefits and limitations.
Premium Bonds pay no interest. You buy them, your money sits there, and every month each £1 bond gets entered into a prize draw. Most months, most people win nothing. The top prize is £1 million. All prizes are tax-free.
So are they worth it? That depends on how much you invest, how much tax you'd pay elsewhere, and how you feel about luck versus certainty.
How they work
Premium Bonds are issued by National Savings & Investments (NS&I), which is backed by the Treasury. Your money is 100% safe in the sense that you'll always get back what you put in. You can cash out any time with no fees or penalties.
The basics:
- Minimum purchase: £25
- Maximum holding: £50,000 per person
- Each £1 bond is a separate entry in the monthly draw
- Prizes range from £25 to £1 million
- All prizes are completely tax-free
More bonds means more entries. Someone with £50,000 in Premium Bonds gets 50,000 chances every month. Someone with £100 gets 100.
What you'll realistically win
NS&I quotes a "prize fund rate" of around 4.65%. That sounds decent, but it's not an interest rate and you won't get 4.65%.
The prize fund rate is the total prize pot divided by the total bonds in circulation. A small number of people win big prizes, which pulls the average up. Most bondholders get less than the headline figure. Many get nothing in a given month.
The odds of any single £1 bond winning are about 21,000 to 1 each month. If you hold £1,000, you'll probably win one or two £25 prizes a year. Hold the full £50,000 and you can expect roughly £50-£100 a month in small prizes, though it's lumpy and unpredictable.
Nobody should buy Premium Bonds expecting to win the million. Two people win it each month out of roughly 22 million bondholders.
Who actually benefits
Premium Bonds make the most sense for higher-rate and additional-rate taxpayers who've already used their ISA allowance.
Here's why. Basic-rate taxpayers get a £1,000 personal savings allowance, meaning the first £1,000 of interest they earn in savings accounts is tax-free anyway. A regular savings account paying 4-5% guaranteed will almost certainly beat the unpredictable returns from Premium Bonds.
Higher-rate taxpayers only get a £500 savings allowance. Additional-rate taxpayers get none at all. If you're in one of those brackets and you've already filled your £20,000 ISA for the year, Premium Bonds are one of the few places left to earn tax-free returns on cash.
Premium Bonds vs the alternatives
| Option | Returns | Tax treatment | Access | Risk |
|---|---|---|---|---|
| Premium Bonds | ~4.65% prize fund rate (actual returns vary widely) | Tax-free | Instant | None (capital guaranteed) |
| Cash ISA | 4-5% (fixed rates available) | Tax-free | Often instant | None |
| Easy-access savings | 4-5% | Taxed above personal savings allowance | Instant | None |
| Stocks and shares ISA | Variable | Tax-free | Takes a few days | Capital at risk |
How to buy them
You can buy Premium Bonds through the NS&I website, the NS&I app, or by phone and post. No fees to buy or sell. You can check your prizes online, through the app, or NS&I will contact you directly for larger wins.
The honest verdict
Premium Bonds are a safe, tax-free place to hold money you might need back. They won't make you rich. Returns are unpredictable and often modest, especially if you hold a smaller amount. But your capital is guaranteed by the government, and every prize is tax-free.
They work best as part of a broader savings plan. Use your ISA allowance first. Then consider Premium Bonds for anything beyond that, particularly if you're a higher-rate taxpayer and your savings allowance is already used up.
If you enjoy the monthly ritual of checking whether ERNIE picked your number, that's a bonus. Just don't build your budget around it.