Premium Bonds have long been one of the UK’s more recognisable saving methods, giving you the chance to win tax-free prizes every month rather than receiving a guaranteed rate of interest.

They’re also incredibly popular, with National Savings & Investments (NS&I) stating that more than 22 million people hold Premium Bonds.

And, from the September 2026 draw, those savers will see the prize fund rate rise from 3.8% to 4.35%. The odds of each £1 bond winning a prize will also improve from 22,000 to 1 to 21,000 to 1.

This could make Premium Bonds feel more attractive, but you should remember that the prize rate isn’t the same as a guaranteed interest rate.

Whether they’re suitable for you will depend on your financial plan and what you need the money to do.

With that in mind, continue reading to find out how Premium Bonds work and when they might fit into your finances.

Premium Bonds offer tax-free prizes rather than guaranteed interest

Premium Bonds are offered by NS&I, which is backed by the Treasury. You can hold up to £50,000 in Premium Bonds.

Each £1 bond is entered into a monthly prize draw, and instead of receiving interest, you have the chance to win tax-free prizes ranging from £25 to £1 million.

The new 4.35% prize fund rate means NS&I expects to pay out over £497 million across more than 6.5 million tax-free prizes in the September 2026 draw.

Just note that the prize fund rate is an average across all Premium Bonds. You might win more than 4.35% in a year if you’re lucky, but you might win less or nothing at all.

You could gain security with Premium Bonds and the chance for a large prize

One of the main advantages of Premium Bonds is that the prizes are tax-free. This could be useful if you’ve already used your ISA allowance or if you’re likely to exceed your Personal Savings Allowance.

Basic-rate taxpayers can usually earn £1,000 of savings interest tax-free, while higher-rate taxpayers can earn £500. Additional-rate taxpayers don’t receive a Personal Savings Allowance.

So, if you’ve exceeded your tax-free interest allowances for the year and you still want to hold a larger portion of your wealth in cash, Premium Bonds could be suitable.

Premium Bonds are also highly secure since they’re backed by the Treasury. This means you don’t have to worry about losing the money you put in, although you could lose value in real terms due to inflation.

What’s more, you can usually cash in Premium Bonds without notice or penalty, making them useful for money you want to keep available.

And of course, there is the appeal of the prize draw, even if the odds are small.

The lack of guaranteed returns could mean your money struggles to keep pace with inflation

As mentioned, returns from Premium Bonds aren’t guaranteed. While a normal savings account will tell you what you’ll receive, you could hold Premium Bonds for months, or even years, without earning any returns.

MoneyWeek reports that most Premium Bond holders have never won a prize, and that 14.3 million people have seen their money remain static since the bonds don’t pay interest.

Even after the recent rise in prize rates, savings accounts could offer more competitive returns.

Moneyfacts states that, as of 7 September 2026, the best easy access savings account offers 4.55%, slightly above the new average Premium Bond prize rate.

Also, if you win little or nothing, the overall value of your money won’t grow. Over time, this means inflation could erode its purchasing power.

Premium Bonds could have a place in your plan, but may not be suitable for long-term growth

Premium Bonds could have a place in your plan if you want secure, easy-access cash and have already made use of your ISA allowance or Personal Savings Allowance – perhaps if you have a big purchase approaching.

However, if you do still have ISA allowance available or need guaranteed growth over the long term, other options might be more appropriate.

For instance, you might prefer a:

  • Higher-interest savings account for short-term cash
  • Cash ISA for tax-free guaranteed interest
  • Diversified investment portfolio for long-term growth.

The right balance will wholly depend on your circumstances. We can help you decide how much cash to hold, where to hold it, and whether Premium Bonds could have a place in your wider financial plan.

Email info@blueskyifas.co.uk or call us on 01189 876655 to find out more about how we can support you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.