Are savers worried about capital gains tax (CGT) unsure whether an ISA or NS&I Premium Bonds is the safer, tax-efficient place for capital that may grow? This guide explains, in plain British English and with up-to-date 2026 context, exactly when ISAs protect against CGT, where Premium Bonds fit into a tax plan and the common mistakes that leave savers exposed.
Key takeaways: what to know in 60 seconds
- ISAs fully shelter gains from Capital Gains Tax on investments held inside the wrapper; that protection applies to stocks & shares ISAs and to gains on disposal.
- Premium Bonds do not create capital gains, but their prize mechanics are not a guaranteed CGT workaround and have different opportunity costs and rules.
- Mistakes such as holding the same investments outside an ISA, mis-timing transfers or exceeding allowances are common reasons savers still face CGT.
- Balance matters: for savers exposed to CGT, prioritising stocks & shares ISA allowance usually beats Premium Bonds for long-term growth and tax certainty.
- Action checklist: calculate likely future gains, use the ISA allowance first for growth assets, treat Premium Bonds as a liquidity/low-risk play rather than a CGT shield.
How capital gains affect ISA vs Premium Bonds for savers
Capital gains occur when an asset is sold for more than its purchase price. The tax implications depend on the wrapper that held that asset at the time of disposal.
- For assets held inside an ISA, no Capital Gains Tax is due on disposal. That applies to both stocks & shares ISAs and to gains on funds and individual shares held within the ISA wrapper. HMRC confirms that ISAs are tax-free wrappers: HMRC - Individual Savings Accounts.
- Premium Bonds are a Government-backed savings product issued by NS&I. They pay prizes via a monthly draw rather than interest. Because there is no sale of an asset and no price appreciation event, there is no CGT on Premium Bonds. See NS&I details: NS&I - Premium Bonds.
How that matters to savers: the relevant difference is that ISAs shield all forms of taxable return (interest, dividends, and capital gains) while Premium Bonds avoid CGT only because no capital asset transfer takes place. The economic consequences differ.
When ISAs shield gains from Capital Gains Tax: rules and practical examples
ISAs protect gains when the underlying asset is held within the ISA at the moment of disposal. Key practical rules:
- Annual allowance: The 2026 ISA allowance stands at £20,000 for adults (indicative at time of writing). Contributions must be within this limit each tax year to receive tax-free treatment.
- Types covered: Cash ISAs (interest tax-free), Stocks & Shares ISAs (dividends and gains tax-free), Innovative Finance ISAs and Junior ISAs for children.
- Transfers: To preserve ISA benefits, use the formal transfer process. Withdrawing and re-depositing using new contributions can waste allowance. Always use the ISA transfer form from the receiving provider.
Example 1: A saver buys £50,000 of shares in a general investment account (GIA) and later sells them realising a £15,000 gain above the CGT allowance. If those holdings had been purchased inside a stocks & shares ISA, that £15,000 gain would be tax-free.
Example 2: If the same saver holds £30,000 as Premium Bonds and wins a £1,000 prize, there is no CGT because prizes are not capital disposals; however, the effective return must be compared to tax-free returns available in ISAs and to inflation.
Mistakes that leave savers exposed to Capital Gains Tax (CGT)
Common errors that cause unnecessary CGT liability are practical and avoidable:
- Failing to use the ISA allowance for growth assets: Putting high-growth investments into a GIA and low-yield cash into an ISA reverses the tax benefit.
- Incorrect transfers: Withdrawing ISA money and re-depositing with a different provider without a proper transfer can lose the tax wrapper for that sum.
- Treating Premium Bonds as a tax shelter for life events: NS&I holdings exceeded by large disposals of assets outside an ISA still generate CGT events.
- Misunderstanding spouse/civil partner rules: simply gifting assets without using transfer rules may create chargeable events or squander annual exemptions.
- Underestimating reliefs and the CGT annual exempt amount: not adding up expected disposals across tax years can result in unexpected tax bills.
Practical avoidance: prioritise putting assets expected to appreciate into an ISA first. Use the CGT annual exempt amount strategically by planning disposals across tax years.
Why Premium Bonds aren’t a true CGT workaround: economic and tax reality
Premium Bonds do not generate CGT because there is no capital disposal — they are nominal bonds that return value via prizes. However, treating them as a workaround for CGT has multiple pitfalls:
- Opportunity cost: Expected real returns from Premium Bonds are variable and depend on the monthly prize rate (prize fund rate). Over multi-year horizons, a well-managed stocks & shares ISA commonly outperforms the average expected return of Premium Bonds for growth assets.
- Prize variability: Returns are stochastic. Many savers experience long periods with no prizes. The expected value can be modelled, but it is not guaranteed income.
- No diversification of capital growth: Premium Bonds are effectively cash-like; they are not suitable for long-term capital growth where ISAs excel.
- Inheritance and estate planning: Premium Bond holdings may be treated differently from ISAs when it comes to estate administration; they do not carry the same tax status as ISAs for Lifetime Allowance considerations.
For authoritative details on how prizes work, consult NS&I: NS&I prize mechanics. For savers primarily facing CGT exposure, remember that Premium Bonds eliminate only the capital gains event by construction; they do not provide the compound growth or tax blanket that an ISA can for investments.
Balancing cash, stocks & shares ISAs and tax for savers affected by capital gains
Decision factors to balance:
- Time horizon: Short-term goals (0–3 years) often favour Cash ISAs or Premium Bonds because capital preservation and liquidity are priorities.
- Medium/long-term growth (5+ years): Stocks & shares ISAs usually provide better expected real returns and the significant benefit of permanently avoiding CGT on disposals.
- Size of potential gains: If expected gains exceed the CGT annual exemption substantially, prioritise ISA space for those assets.
- Risk tolerance: Premium Bonds have capital security (backed by HM Government via NS&I) and no principal loss, while stocks & shares ISAs carry market risk but tax-free growth.
A simple decision matrix (conceptual):
| Situation |
Primary recommended wrapper |
Why |
| Expected significant capital appreciation |
Stocks & shares ISA |
Avoid CGT on large disposals; tax-free compounding |
| Need short-term low-risk liquidity but prefer chance of upside |
Premium Bonds |
Capital security and prize potential; no CGT but lower expected return |
| Need steady interest with protection |
Cash ISA |
Tax-free interest with liquidity |
| Mixed goals |
Split allocation: ISA for growth, Premium Bonds for emergency cash |
Balance tax sheltering and liquidity |
Comparative mechanics: capital gains, tax and transfers (quick reference)
| Feature |
Stocks & shares ISA |
Premium Bonds |
General investment account (GIA) |
| CGT on disposal |
No |
Not applicable (no disposal) |
Yes, after annual exemption |
| Interest/dividends tax |
No |
N/A (prizes) |
Taxable |
| Government guarantee |
No (depends on provider) |
Yes (NS&I/treasury-backed) |
No |
| Liquidity |
Variable (may need to sell assets) |
High (can cash in instantly) |
High |
| Best for |
Long-term growth, tax-free disposal |
Low-risk savings with prize upside |
Active trading not within ISA allowance |
Practical checklist: choosing ISA or NS&I Premium Bonds for savers affected by capital gains
- Estimate likely capital gains on investments over the holding period. If projected gains exceed the CGT exemption, favour a stocks & shares ISA.
- Use annual ISA allowance for assets expected to appreciate most. Transfers preserve wrapper—do not withdraw-and-top-up.
- Keep an emergency fund outside volatile investments: Premium Bonds or a Cash ISA are reasonable options, but avoid using ISA allowance for cash if capital appreciation assets are unprotected.
- Consider timing of disposals: spread disposals across tax years to use the CGT annual exempt amount where transferring into an ISA is not possible.
- Check spouse transfer rules and bed-and-spouse options: these require careful timing and may have tax implications.
- Validate with HMRC guidance on CGT: HMRC - Capital Gains Tax.
Expected value comparison: why numbers matter (simple numeric thought-experiment)
- If a saver expects an average annual growth of 5% on equities and the ISA shelter removes CGT (nominally 18% or 28% depending on rate), the compound benefit over 10 years is material compared with the stochastic prize distribution of Premium Bonds.
- For small capital sums where expected gain is within the CGT exemption, Premium Bonds can be neutral. For larger sums, ISAs usually win for growth.
Visual flow: deciding between ISA and Premium Bonds
Step 1 🧾 Estimate expected capital gains → Step 2 ⚖️ Compare ISA allowance vs expected gains → Step 3 🧰 Prioritise stocks & shares ISA for growth, use Premium Bonds for emergency/low-risk cash → ✅ Tax-efficient outcome
Comparative checklist: ISA vs Premium Bonds
✓ If expecting significant capital growth
Use stocks & shares ISA to shelter gains from CGT.
⚠ If needing liquidity and capital security
Consider Premium Bonds for guaranteed capital and prize upside.
💡 Hybrid approach
Use ISA allowance for growth assets; keep 3–6 months in Premium Bonds or cash ISA for emergencies.
Strategic analysis: advantages, risks and mistakes to avoid when CGT matters
Advantages / when to apply ✅
- Use stocks & shares ISAs when expecting material future capital gains: permanent CGT avoidance is the primary advantage.
- Use Premium Bonds for capital security, prize potential and immediate liquidity without CGT events.
- Use Cash ISAs for short-term savings while keeping ISA allowance dedicated to growth assets.
Errors to avoid / risks ⚠️
- Not using ISA allowance for appreciating assets.
- Using ISA allowance for cash while holding significant growth assets outside ISAs.
- Mismanaging transfers (withdraw-and-redeposit).
- Overestimating the effective annual return of Premium Bonds compared to tax-free compounded returns in ISAs.
Questions savers ask: frequently asked questions
Can ISAs protect me from capital gains tax on shares?
Yes. Shares held inside a stocks & shares ISA are exempt from Capital Gains Tax when sold.
Do Premium Bonds avoid Capital Gains Tax?
Premium Bonds do not create CGT because there is no capital disposal; prizes are not treated as capital gains.
Should a saver prioritise ISA allowance over Premium Bonds to avoid CGT?
Generally, yes if the saver expects significant capital appreciation; an ISA shelter for those assets gives clearer tax certainty.
What mistakes make savers still pay CGT despite using ISAs?
Common mistakes include withdrawing and re-depositing instead of transferring and holding growth assets outside an ISA.
Can prizes from Premium Bonds be taxed?
No CGT applies. Prizes are tax-free, but they are not tax shelters for capital growth; always compare effective returns.
How to transfer investments into an ISA without losing tax benefits?
Use the formal ISA transfer process offered by providers; do not withdraw and re-deposit, or allowance may be wasted.
Is it worth moving an existing GIA portfolio into an ISA to avoid CGT?
If the expected future gains are material and ISA allowance is available, transferring via a bed-and-ISA or vendor transfer can be beneficial; check provider rules and potential disposal events.
If married, can spouses use each other’s ISA allowances to avoid CGT?
No, ISA allowances are individual, but certain transfers and gifts between spouses can be planned; professional tax advice is recommended for complex cases.
- Calculate the approximate future capital gains expected on current holdings and compare to the CGT annual exemption.
- Use available ISA allowance first for assets with the highest expected appreciation; arrange formal transfers if needed.
- Keep an emergency buffer in Premium Bonds or a Cash ISA, not at the expense of protecting growth assets from CGT.
Sources and further reading