Premium Bonds vs Cash ISA: The Maths on £20,000 Shows a Clear Winner

Premium Bonds don't pay interest. Instead, NS&I puts the equivalent of a 3.30% annual return (from April 2026, down from 3.60%) into a monthly prize pot. Your individual bonds are entered into a draw with odds of 23,000 to 1 per £1 bond per month.

The prizes are genuinely tax-free — they don't count towards your Personal Savings Allowance or any other tax threshold. That's their main selling point.

But here's what people miss: that 3.30% is the average return across all bondholders. Most people get significantly less than the headline rate. NS&I's own data shows the median return is lower because the prize distribution is heavily skewed by the two £1 million jackpots.

With £20,000 in Premium Bonds (see our savings guide for the full picture), your expected annual prize winnings are £660. With the same amount in a top Cash ISA at 4.68%, you'd earn £936 — guaranteed, not a lottery outcome. That's £276 more, every single year.

The prize distribution is worth examining. In the March 2026 draw, NS&I distributed two £1 million prizes, four £100,000 prizes, nine £50,000 prizes, and 17 prizes of £25,000. The vast majority of prizes — over 4.7 million — are the minimum £25. If you hold £10,000 in bonds, you'll statistically win around five or six £25 prizes per year — £125 to £150, well below the 3.30% headline rate.

The expected return only approaches the prize fund rate for holders near the £50,000 maximum. Smaller holdings experience greater variance: some months nothing, other months a £25 prize. The median bondholder gets less than the mean, because the distribution is right-skewed by large prizes that very few people win.

Premium Bonds' tax-free status only matters if you'd actually pay tax on savings interest elsewhere. Most people wouldn't.

The Personal Savings Allowance gives basic-rate taxpayers £1,000 of tax-free interest and higher-rate taxpayers £500. On top of that, Cash ISA interest is entirely tax-free (see our ISA guide for all ISA types) regardless of how much you earn — it doesn't count towards your PSA at all.

So the comparison isn't Premium Bonds (tax-free) vs Cash ISA (taxed). It's Premium Bonds (tax-free, 3.30% expected) vs Cash ISA (also tax-free, 4.68% guaranteed).

The only scenario where Premium Bonds have a genuine tax advantage over a Cash ISA is when you've already used your full £20,000 ISA allowance and you're an additional-rate taxpayer with no PSA. In that case, savings interest in a regular account would be taxed at 45%, and Premium Bonds offer a tax-free alternative.

Scenario	Premium Bonds Edge?
Basic-rate taxpayer, ISA not maxed	No — Cash ISA pays more, also tax-free
Higher-rate taxpayer, ISA not maxed	No — Cash ISA pays more, also tax-free
Additional-rate taxpayer, ISA maxed	Yes — the only scenario where tax-free status matters
Any taxpayer with savings under £1,000 interest	No — PSA covers the interest anyway

NS&I's decision to cut the prize fund rate from 3.60% to 3.30% from the April 2026 draw makes the case against Premium Bonds even stronger. The odds of winning drop from 22,000 to 1 to 23,000 to 1 per £1 bond.

This isn't surprising. NS&I typically adjusts rates in line with the BoE base rate, and they've been a consistent 15-25 basis points below the best Cash ISAs for years. But the gap is widening: when the prize fund rate was 4.00% in early 2025 and the best Cash ISAs were at 5.00%, the difference was 100 basis points. Now it's 138 basis points.

Every time the BoE cuts, NS&I follows — often more aggressively than the Cash ISA market. If you're holding Premium Bonds hoping for a jackpot, the expected value of that gamble keeps shrinking.

NS&I's role as a government savings vehicle means they deliberately avoid offering market-leading rates. The Treasury uses NS&I to raise retail funding, but too-generous rates would distort the savings market by pulling deposits away from banks and building societies. That's why NS&I rates consistently lag the best high-street alternatives — it's policy, not incompetence.

For savers, this means NS&I products (Premium Bonds, Direct Saver, Direct ISA) should be evaluated on their unique features — tax-free prizes, government backing, simplicity — rather than expected returns. On pure return terms, they'll almost always trail the market leaders.

Premium Bonds aren't a bad product. They're just the wrong first choice for most people's savings.

They work well as a parking spot for cash above your ISA allowance if you're a higher or additional-rate taxpayer. The £50,000 maximum holding is generous, and the FSCS-equivalent backing from HM Treasury (100% of your money is backed, with no £85,000 cap) is stronger than any high-street bank.

They also suit people who genuinely struggle to save but respond to the gamification of monthly prize draws. Behavioural economics research shows that prize-linked savings accounts increase savings rates among people who otherwise wouldn't save. If the lottery element keeps you from spending, the lower expected return is a price worth paying.

But if you're a rational saver comparing returns: fill your Cash ISA first, use your PSA on any non-ISA savings, and only then consider Premium Bonds for anything above those thresholds.

Before 5 April 2026, you still have your full £20,000 ISA allowance for the 2025/26 tax year. Here's the order that maximises your tax-free returns:

Step 1: Max your Cash ISA. The best easy access rates are 4.68% — guaranteed, tax-free, no lottery involved. That's £936 on £20,000.

Step 2: Use your PSA. Basic-rate taxpayers get £1,000 of interest tax-free in regular savings accounts. At 4.68%, that's roughly £21,400 you can hold outside an ISA before paying tax.

Step 3: Then consider Premium Bonds. If you've maxed your ISA and used your PSA, Premium Bonds at 3.30% offer a tax-free home for up to £50,000. For higher and additional-rate taxpayers, this is where they earn their place.

Step 4: Regular savings accounts for anything above £50,000 in Premium Bonds. You'll pay tax on the interest, but the rates are often higher than Premium Bonds' expected return even after tax.

The mistake most people make is putting money into Premium Bonds instead of a Cash ISA. With 17 days left until the April 5 ISA deadline, that's £276 per year you're leaving on the table.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.

One common mistake is treating Premium Bonds as a long-term savings strategy. Because the prize fund rate is variable and typically tracks below the BoE base rate, the long-term real return (after inflation) on Premium Bonds has often been negative. With CPI inflation at 3.0%, a 3.30% expected return barely preserves purchasing power. A Cash ISA at 4.68% at least gives you a positive real return of around 1.7%.

<p>For related guidance, see our article on <a href="/posts/premium-bonds-are-still-the-safest-bet-in-uk-savings-heres-why-risk-free-savers">why Premium Bonds remain the safest bet for risk-free savers</a>.</p>