Are Premium Bonds or prize-linked savings accounts better for savers who want low risk, tax efficiency and reasonable access to cash? Many savers arrive at the same question: how to choose between a government-backed prize approach and tax-free cash savings? This guide explains the mechanics, tax treatment, expected returns and practical suitability of Premium Bonds versus prize-linked savings accounts so a clear decision can be made for short-, medium- or long-term goals.
Key takeaways: what to know in 1 minute
- Premium Bonds are government-backed and tax-free for UK residents, but returns are variable and delivered as tax-free prizes rather than interest.
- Prize-linked savings accounts (PLSAs) offered by other providers can mimic the prize model but often do not offer the same security or tax treatment as NS&I Premium Bonds.
- Expected return matters: the value expected from Premium Bonds is the average prize rate; compare this with typical Cash ISA rates and inflation to judge real value.
- Liquidity and access differ: Premium Bonds are easy to cash in but prize timing and odds affect short-term usefulness; Cash ISAs usually pay interest monthly or annually and suit predictable emergency funds.
- Match product to purpose: for an emergency fund, a Cash ISA usually wins; for speculative upside with capital preservation, Premium Bonds or prize-linked accounts may suit some savers.
How Premium Bonds compare with cash ISAs and prize-linked savings accounts
Premium Bonds (NS&I) are a prize-linked savings product: each £1 bond is an entry into monthly draws where prizes replace interest. Cash ISAs are tax-advantaged deposit accounts that pay interest. Prize-linked savings accounts from private providers follow the same behavioural model—few large prizes, many small prizes—but legal status, security and taxation differ.
Key practical distinctions:
- Ownership and guarantee: Premium Bonds are backed by HM Treasury via National Savings & Investments. Cash ISAs are deposits with banks/building societies and generally covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per institution. Private prize-linked accounts are subject to the provider’s own regulatory status and FSCS coverage if they are a regulated deposit-taker.
- Return delivery: Premium Bonds pay via random prizes; Cash ISAs pay explicit interest rates. Private PLSAs may pay prizes but sometimes combine them with a baseline interest.
- Tax: Premium Bond prizes are tax-free for individuals in the UK. Interest on Cash ISAs is also tax-free when held within an ISA wrapper. Private PLSAs usually pay taxable prizes or interest unless structured within an ISA wrapper.
Compare sources: the official NS&I site explains Premium Bonds and current prize rates NS&I: Premium Bonds. HM Government guidance on ISAs is available at GOV.UK: ISAs.
Tax treatment and tax-free status: ISAs, Premium Bonds
- Premium Bonds: prizes are tax-free for UK individuals. No tax reporting is required for prize proceeds. The capital value (the purchase price of bonds) is not subject to tax.
- Cash ISAs: interest earned inside an ISA is tax-free. ISAs use annual allowances (the 2026/27 allowance is indicative and should be checked on GOV.UK). Funds inside an ISA maintain tax-free growth for interest income.
- Prize-linked savings from private providers: taxation depends on structure. If the product is a deposit in a bank, interest or prizes may be taxable unless inside an ISA. If the product is operated as a promotional prize scheme or savings wrapper, tax treatment can vary; always verify with the provider and HMRC guidance.
Practical implication: for tax-free income, both Premium Bonds and Cash ISAs deliver tax-free outcomes provided each is used within its rules, but private prize-linked accounts rarely replicate the automatic tax-free status that Premium Bonds enjoy due to government backing.
Expected returns, prize odds and long-run value
Expected return (value expected) is central to comparing prize-linked products with interest-bearing accounts. For Premium Bonds, NS&I publishes an annual prize fund rate (for example, the indicative prize fund rate was 3.2% in recent snapshots — this is indicative at time of writing). The prize fund rate is not the same as a guaranteed interest rate; it is the total value of all prizes divided by the total value of bonds.
How to think about expected return:
- Value expected (EV) = prize fund rate. If the prize fund rate is 3% and a saver holds £10,000 in bonds, the average annual prize value expected is roughly £300. But actual outcomes vary: many accounts win nothing while some win large prizes.
- Probability and distribution: odds of winning depend on the number of £1 bonds held. NS&I publishes the odds per £1 bond for each monthly draw (for example, 1 in 25,000 is a typical ballpark for small prizes when prize fund rates are low—verify on NS&I for current odds).
- Variance and time horizon: over a long horizon and with many bonds, actual returns will converge toward expected value. For small holdings or short horizons, variance dominates: the most likely outcome for small savers is to win nothing.
Example calculations (illustrative and indicative at time of writing):
- Own £1,000 in Premium Bonds. If the published prize fund rate is 3%, expected annual prize value ≈ £30. Probability of any prize in a single month is modest; probability of at least one prize in a year is lower than many expect.
- Compare to a Cash ISA paying 2.5%: £1,000 at 2.5% = £25 interest/year, paid regularly, predictable and low variance.
A realistic approach is to compute EV and then compare: EV difference = Premium Bonds EV − Cash ISA rate. If EV is higher, Premium Bonds are competitive on expected returns, but liquidity timing, prize variance and personal risk preference must be accounted for.
How NS&I Premium Bonds prize draws work
Each £1 bond is a ticket entered into a monthly draw. NS&I uses a random number process to allocate prizes from a prize fund. Prizes have fixed nominal values (for example, £25, £100, £1,000, up to top prizes of £1 million). The number and sizes of prizes are set so that the overall prize fund equals the published prize fund rate times the total value of bonds.
Steps in the process:
- NS&I calculates the prize fund from its published rate and total holdings.
- A monthly draw selects winners at random across all bonds held.
- Winners are notified and prizes are paid tax-free to the saver’s nominated account.
Where to check current odds and prize fund: see NS&I: Premium Bonds for the latest published odds and allocations. Historical trends show prize fund rates fluctuate with NS&I’s funding requirements and broader interest-rate environment.
Access, liquidity and using savings for emergencies
- Premium Bonds: money is capital-preserved (bonds can be cashed in at face value). Redemption usually takes a few working days if done online or by phone; cashing in instantly is not guaranteed. Prizes are only awarded in monthly draws, so winning does not provide reliable short-term income.
- Cash ISAs: typically instant access or notice accounts are available. Interest payment timing differs (monthly or annually) but cash can generally be withdrawn quickly. For an emergency fund, predictable liquidity and near-term access favour Cash ISAs or instant-access savings accounts.
Practical recommendation: an emergency fund should prioritise accessibility and predictable value. Premium Bonds can be part of an emergency strategy but only if the saver accepts the randomness of prize timing. For households needing funds within months, Cash ISAs or instant access accounts reduce risk of short-term shortfall.
Table: quick comparison of Premium Bonds, Cash ISAs and private prize-linked savings
| Feature |
Premium Bonds (NS&I) |
Cash ISA |
Private prize-linked savings |
| Security |
Backed by HM Treasury (NS&I) |
FSCS up to £85,000 per institution |
Varies; check FSCS and regulatory status |
| Taxes |
Prizes tax-free for individuals |
Interest tax-free within ISA wrapper |
Usually taxable unless inside ISA |
| Return profile |
Random prizes; EV = prize fund rate |
Predictable interest rate |
Depends on provider and model |
| Liquidity |
Redeemable; prize timing uncertain |
Usually instant access options |
Varies widely |
| Best for |
Capital preservation + chance of windfall |
Emergency fund, predictable returns |
Those chasing prizes but check safety |
Visual flow for choosing between Premium Bonds and prize-linked accounts
Which saving option fits your goal?
🎯 Goal: emergency fund
✅ Prefer: instant-access Cash ISA or savings account
💡 Goal: steady tax-free returns
✅ Prefer: Cash ISA inside allowance
🎲 Goal: chance of big win with capital preserved
✅ Prefer: Premium Bonds for government backing
Emoji process: quick decision flow
Step 1 🔎 Check your goal and time horizon → Step 2 📊 Compare expected return vs cash ISA → Step 3 ⚖️ Consider tax and security → ✅ Choose product that matches use case
Advantages, risks and common mistakes
Which suits your savings goals: ISA or Premium Bonds?
- Emergency fund (3–6 months of expenses): Cash ISA or instant-access savings account — predictability and immediate access matter more than upside chance.
- Medium-term saving (1–5 years) where occasional windfalls are acceptable: Premium Bonds can be included, but ensure immediate needs are covered elsewhere.
- Long-term low-risk saving (5+ years): evaluate expected return vs inflation and consider ISAs or low-cost diversified investments in an ISA wrapper.
Decision checklist:
- Is capital safety essential? If yes, both Premium Bonds and Cash ISAs provide strong capital protection.
- Is tax-free status important? Use ISA for interest; Premium Bonds deliver tax-free prizes automatically.
- Is consistent short-term income required? Choose Cash ISA.
- Is the saver comfortable with variance and occasional wins? Premium Bonds or prize-linked accounts may appeal.
Practical steps to compare expected value with a Cash ISA (short method)
- Find the current NS&I prize fund rate on NS&I.
- Compare that rate to advertised Cash ISA rates for similar deposit levels (check provider sites and comparison services).
- Consider access time and the probability of winning a prize in the period relevant to the saver’s goal.
For exact personal calculations, use a calculator that computes expected value, probability of at least one win and compares after-tax outcomes. If a provider offers a prize-linked account inside an ISA wrapper, assess whether the product preserves tax advantages.
Questions frequently asked
Are Premium Bonds better than a cash ISA for short-term savings?
For short-term needs, a Cash ISA usually is better because interest is predictable and funds are instantly accessible; Premium Bonds are uncertain in timing and prizes.
Can a prize-linked savings account be held inside an ISA?
Some prize-linked products can be offered within an ISA wrapper; confirm with the provider and ensure the ISA rules are followed. NS&I Premium Bonds are not an ISA product by themselves but can be part of an overall ISA strategy.
How likely is it to win a prize with Premium Bonds?
Odds depend on the number of £1 bonds held and the current odds published by NS&I. Small holdings have a low chance of frequent wins; the probability of at least one win rises with the number of bonds and time horizon.
Are Premium Bond prizes taxable?
No. Prizes from Premium Bonds are tax-free for UK individuals.
Are private prize-linked savings accounts safe?
Safety depends on the provider. If the provider is a regulated bank/building society, savings may be FSCS-protected up to £85,000. If not, the capital risk may be higher. Always verify regulatory status and FSCS coverage.
What happens if NS&I changes the prize fund rate?
NS&I may adjust the prize fund rate with notice. Changes affect the expected return. Historical changes have varied with macroeconomic conditions.
Your next step:
- Check the current NS&I prize fund rate and published odds on NS&I and compare with live Cash ISA rates from reputable comparison sites.
- Decide the purpose of the savings (emergency, medium-term, long-term) and allocate accordingly: emergency funds in instant-access ISAs, discretionary capital in Premium Bonds if comfortable with variance.
- If considering private prize-linked accounts, verify FSCS protection and tax treatment, and ask for clear documentation before depositing funds.