Premium Bonds vs cash ISA

Premium Bonds and cash ISAs are both tax-free ways to hold savings in the UK, but they work in fundamentally different ways. Premium Bonds pay no interest at all: instead, every £1 Bond is entered into a monthly prize draw with prizes from £25 to £1 million. A cash ISA pays interest, and that interest is free from UK Income Tax and Capital Gains Tax while the money stays in the ISA.

The choice matters because the outcomes are so different. With Premium Bonds you can hold up to £50,000, and the prize fund rate is 4.35% annual, variable from the September prize draw, but that rate funds the prize pool rather than being paid to each holder. With a cash ISA you can put in up to £20,000 per tax year across all your ISAs, and the interest is guaranteed by the terms of the account. One offers a chance at a large prize; the other offers certainty.

Both are protected, but by different mechanisms. Premium Bonds are backed by HM Treasury. Cash ISAs held with banks, building societies and credit unions authorised by the PRA and FCA are covered by the Financial Services Compensation Scheme up to £120,000 per eligible depositor.

How Premium Bonds and a cash ISA each work

Premium Bonds are a savings product where each £1 Bond is entered into a monthly prize draw instead of earning interest. You buy them for £1 each, with a minimum purchase of £25, and you can invest up to £50,000¹. The prize fund rate is the rate of interest applicable to each Bond unit eligible for entry into the draw for a given month, and together with the number of Bond units it determines the prize fund for that month⁶. NS&I's interest rates and the Premium Bonds prize fund rate are set by HM Treasury and may change from time to time⁷.

A cash ISA works like a tax-free savings account⁸. There are two main types: variable and fixed rate⁹. Variable rate cash ISAs, typically easy or instant access, give you a variable interest rate which your bank or savings provider can change at any time¹⁰. Fixed rate cash ISAs lock your money away for a set term, and you usually cannot withdraw during the fixed term without penalty unless the product rules allow it¹⁰. NS&I offers a cash ISA with a variable interest rate called a Direct ISA¹¹.

The structural difference is what happens to your money month by month. With Premium Bonds, the return is distributed by chance: some holders win large prizes, many win nothing. With a cash ISA, the return is contractual: the provider pays the rate it has agreed, and that rate may be fixed for a term or variable.

Returns: prize draws or guaranteed interest

Premium Bonds do not pay interest. Instead, the rate funds a monthly prize draw for tax-free prizes¹. Prizes range from £25 to £1 million, and there are three value bands (higher, medium and lower) with a percentage share of the monthly prize fund allocated to each¹³. The odds of winning any prize are 21,000 to 1 for every £1 Bond in the monthly prize draw, variable from the July 2026 prize draw¹. Before that, the odds were 23,000 to 1 until the June 2026 prize draw¹⁴.

The prize fund rate is 4.35% annual, variable from the September prize draw¹. It had been 3.30% until the June 2026 prize draw, rising to 4.35% from the July 2026 prize draw¹⁴. That rate is not a return paid to each holder: it is the rate that determines the size of the prize fund. A holder with average luck might receive a return close to that rate over time, but many will receive less and some will receive nothing in any given month.

A cash ISA pays interest. The rate may be fixed for a term or variable. For context, one comparison found that the top instant-access cash ISA could yield £152 more interest after a year than the current market-leading savings account for a higher-rate taxpayer with £20,000, assuming the variable rate stays the same¹⁶. The difference between a one-year fixed cash ISA and a savings account was £121¹⁶. These figures illustrate that cash ISA rates can be competitive with, or better than, ordinary savings accounts, though rates change.

Tax: both are tax-free, in different ways

Premium Bonds are tax-free¹. They are exempt from income tax and capital gains tax¹⁸. This means any prizes you win are yours to keep without a tax bill.

Cash ISAs are also tax-free, but the mechanism is different. ISAs are tax-exempt cash, stocks and shares and/or innovative finance accounts under which any income received is free from UK Income Tax and Capital Gains Tax while the money stays in the ISA¹². Interest is paid gross, free from UK Income Tax and Capital Gains Tax, and does not impact your Personal Savings Allowance¹⁹. Gains, whether interest on cash or potential investment returns, are free from tax²⁰.

The practical difference is that Premium Bonds generate no income to tax in the first place, because they pay no interest. A cash ISA generates interest, but that interest is sheltered from tax. Both achieve the same outcome for the holder: no tax to pay on the returns.

For a higher-rate taxpayer, the tax shelter of a cash ISA can be worth more than the headline rate suggests. One analysis found that a higher-rate taxpayer with £20,000 in an Atom Bank Easy Access Cash ISA could earn almost £100 more than if they placed the same amount in the top instant-access savings account once tax is deducted¹⁶. That difference arises because savings account interest outside an ISA may be taxed, depending on the holder's Personal Savings Allowance.

Limits: up to £50,000 in Premium Bonds and £20,000 a year in ISAs

Premium Bonds have a holding limit of £50,000⁵. You can invest from £25 up to that maximum⁵. Any Premium Bond numbers that go over the £50,000 limit are not eligible to win prizes, and if a number beyond the limit is drawn and a prize paid in error, NS&I has the right to reclaim it¹.

The ISA allowance is £20,000 per tax year, across Cash, Stocks and Shares and Innovative Finance ISAs². You can put up to £20,000 in a cash and/or stocks and shares ISA per year¹⁸. The overall annual ISA limit is £20,000²¹.

From April 2027, the cash ISA limit is set to change. The annual ISA cash limit will be set at £12,000, within the overall annual ISA limit of £20,000²¹. Savers over 65 will retain the £20,000 cash ISA limit²¹. This means that from April 2027, savers aged 65 and under will be able to put up to £12,000 into a cash ISA each tax year, with the remaining £8,000 of the overall £20,000 allowance available for stocks and shares or innovative finance ISAs.

The two limits operate independently. Money in Premium Bonds does not count towards your ISA allowance, and money in an ISA does not count towards your Premium Bonds holding limit. You can hold both at the same time.

Getting your money out

Premium Bonds are easy to cash in. You can withdraw your money by contacting NS&I, and there is no penalty for doing so. The prize fund rate is variable, and you can cash in your Bonds at any time.

Cash ISAs vary by type. With a variable rate cash ISA, typically easy or instant access, you can usually withdraw your money without penalty, though the rate you earn may change¹⁰. With a fixed rate cash ISA, you usually cannot withdraw money during the fixed term without penalty, unless the product rules allow it¹⁰. Some fixed rate cash ISAs allow access subject to a charge, while others do not permit withdrawals at all during the term.

The term of a fixed rate cash ISA can vary. Some providers offer two-year and three-year bonds²². If you need access to your money before the term ends, you may face an early access charge or be unable to withdraw.

For ISAs generally, there is usually no fixed term: you can hold either a cash ISA or a stocks and shares ISA for as long as you want to²³. The fixed term applies to the specific product, not to the ISA wrapper itself.

Protection: Treasury-backed or FSCS up to £120,000

Premium Bonds are backed by HM Treasury. NS&I states that your money will be 100% secure, backed by HM Treasury⁴. This means the government guarantees the return of your capital, though not the prize fund rate or the odds of winning.

Cash ISAs held with banks, building societies and credit unions authorised by the PRA and FCA are covered by the Financial Services Compensation Scheme up to £120,000 per eligible depositor³. This includes deposits in current accounts, savings accounts, cash ISAs and savings bonds²⁴. For joint accounts, the limit is £240,000²⁵.

The FSCS limit applies per eligible depositor, per firm. If you hold cash ISAs with more than one provider, each provider has its own £120,000 limit, provided they are separately authorised. If two brands share a banking licence, your money with both counts towards the same £120,000 limit.

The protection is different in kind. Premium Bonds are backed by the government, so there is no limit on the amount protected beyond the £50,000 holding limit itself. Cash ISAs are protected by the FSCS up to £120,000 per eligible depositor, per firm. If you hold more than £120,000 in cash ISAs with a single provider, the excess is not protected.

Who each one tends to suit

Premium Bonds tend to appeal to savers who want the chance to win a prize and are comfortable with the possibility of receiving no return in a given month. Around one in eight adults said they held Premium Bonds (13%), with higher rates among older age groups: 6% for ages 25 to 34, 24% for ages 65 to 74, and 26% for ages 75 to 84²⁶. The product is often held alongside other savings.

Cash ISAs tend to appeal to savers who want a guaranteed return and the certainty of tax-free interest. Cash ISA subscribers are more likely to be older: individuals aged 65 or older make up 34% of the population subscribing to a cash ISA, compared to 24% of the UK adult population²⁷. Those aged 55 to 64 make up 18% of cash ISA subscribers, compared to 17% of the UK adult population²⁷. Females are slightly overrepresented among cash ISA subscribers at 53%, compared to 50% of the UK adult population²⁷.

Cash ISAs are usually better if you are saving for less than five years, do not want to risk losing money because of stock market movements, or might need to take your money out at short notice²³. Premium Bonds suit savers who are willing to trade certainty of return for the chance of a prize, and who value the Treasury backing.

A portfolio with a greater proportion of bonds and cash will be lower risk, but leaves your money vulnerable to being eroded by inflation²⁸. This applies to both Premium Bonds and cash ISAs: if the return is lower than inflation, the buying power of your savings falls over time.

Holding both at the same time

You can hold both Premium Bonds and a cash ISA at the same time. The two products are separate, and money in one does not affect the other. You can have both a cash ISA and a stocks and shares ISA at the same time, and you can even have more than one cash ISA or more than one stocks and shares ISA at the same time if you want²⁰.

The limits are independent. You can hold up to £50,000 in Premium Bonds and use your full ISA allowance of £20,000 per tax year². Money in Premium Bonds does not count towards your ISA allowance, and money in an ISA does not count towards your Premium Bonds holding limit.

If you hold more than one cash ISA product with the same provider, they may be combined into a single cash ISA. For example, when you open more than one cash ISA product with Nationwide, they create a portfolio cash ISA, which keeps all your products together as a single cash ISA²⁹.

Children can hold both Premium Bonds and a Junior ISA. Children under 16 can hold NS&I's Junior ISA, Premium Bonds and Investment Account¹⁴. A child must not hold more than £50,000 of Premium Bonds in total¹. Children can hold one cash Junior ISA and one stocks and shares Junior ISA at the same time¹⁰. Adult cash ISAs are available to children from the age of 16¹².