Premium Bonds Explained: How They Work and Who They Suit

Premium Bonds are a savings product from National Savings and Investments (NS&I), which is backed by HM Treasury. Instead of paying interest, they enter you into a monthly prize draw. You can always get your money back, and any prizes you win are tax-free. This guide explains how Premium Bonds work, what the prize fund rate really means, the pros and cons, and who Premium Bonds suit.

How Premium Bonds work

Each £1 you hold is a separate bond with its own number. Every month, a random number generator, known as ERNIE, picks the winning bonds. Prizes range from £25 up to a £1 million jackpot. You can hold between £25 and £50,000, and new bonds become eligible for the draw after a short qualifying period following the month you buy them. Once eligible, every bond is entered into every monthly draw for as long as you hold it.

You can buy and cash in Premium Bonds online, through the NS&I app or by phone. Prizes can be paid into your bank account or automatically reinvested in more bonds, which increases your chances in future draws.

What the prize fund rate means

NS&I sets a "prize fund rate", which is the total value of prizes paid out as a percentage of all bonds. It is an average, not what you will receive: most prizes are £25, and many holders win nothing in a given month. The odds of each £1 bond winning are published and change when NS&I adjusts the rate.

With a small holding, such as £1,000, you might go many months without a prize. With the maximum £50,000, you would expect to win something most months, but your actual return could still be above or below the prize fund rate. Comparing the prize fund rate with savings account rates gives a rough idea of value, but luck plays a large part.

Why people like Premium Bonds

The biggest attraction is safety. Because NS&I is backed by the Treasury, all of your money is protected, with no limit, unlike bank deposits, which are protected up to the Financial Services Compensation Scheme limit. Prizes are free of income tax and capital gains tax, which appeals to higher-rate and additional-rate taxpayers who have used up their personal savings allowance (see tax on savings interest). There is also the small chance of a life-changing win, and many savers enjoy the monthly draw.

The trade-off

Because returns depend on luck, you may earn less than in a good savings account, especially with smaller holdings. The "average" return only tends to show through with large holdings over long periods, and even then individual results vary. Inflation also reduces the value of money that wins nothing, so a run of bad luck means your savings lose buying power.

Who Premium Bonds suit

Premium Bonds can make sense for savers who value complete security, pay higher-rate tax on interest, and already use their ISA allowance (see ISA allowance 2026/27). They can also suit people with savings above the FSCS limit who want all their money government-backed.

They are less suitable as your only savings if you are a basic-rate taxpayer with a modest balance, where a competitive easy-access account or cash ISA usually pays more reliably. For long-term goals such as retirement, investments in a pension or stocks and shares ISA are likely to grow faster; see our guide to workplace pensions.

Premium Bonds as an emergency fund

Because you can cash in Premium Bonds at any time without penalty, some people use them for part of their emergency fund. Withdrawals usually take a few working days, so keep a small amount in an instant-access account for urgent costs.

Frequently asked questions

Are Premium Bond prizes taxed?

No. Prizes are free of income tax and capital gains tax.

How much can I hold in Premium Bonds?

Between £25 and £50,000.

Are Premium Bonds safe?

Yes. NS&I is backed by HM Treasury, so all of your money is protected with no limit.

Premium Bonds explained: how they work and who they suit