A prize fund, rather than an interest rate
Premium Bonds do not pay interest. Each eligible £1 bond enters a monthly draw, and the variable prize-fund rate determines the total value of prizes across all eligible bonds. From the July 2026 draw, NS&I lists a 3.80% annual prize-fund rate and odds of 22,000 to 1 for each £1 bond in each monthly draw.
The rate is an average across the whole prize fund, including a small number of very large prizes. An individual holder may receive more, less or nothing. Larger holdings create more entries and tend to produce a result closer to the average over time, without making any particular return certain.
Certainty has value
A savings account states an interest rate and pays interest under its terms. Premium Bonds exchange that predictable return for a distribution of tax-free prizes and a remote chance of a very large win.
This distinction matters for money with a firm date or target. If the amount must grow by a known minimum, compare guaranteed savings rates and access terms. If flexibility, security and the draw appeal matter more, Premium Bonds may still fit the purpose.
Tax can change the comparison
Premium Bond prizes are free of UK Income Tax and Capital Gains Tax. Interest outside an ISA may be taxable after any available starting-rate band or Personal Savings Allowance, so the relevant comparison is sometimes a savings account’s after-tax return.
The tax advantage is personal. Many savers owe no tax on cash interest, while others have already used their allowances. Compare the actual account rate available to you, then apply your own tax position rather than assuming Premium Bonds are automatically better or worse.
Security, access and limits
NS&I is backed by HM Treasury, and eligible Premium Bond holdings can be cashed in. New bonds must normally be held for a full calendar month before entering a draw, so they do not generate an immediate return.
The maximum holding is £50,000 per person. Keep near-term payment dates, withdrawal processing time and the possibility of receiving no prizes in view when deciding how much cash belongs there.
Sources and further reading