Premium Bonds vs. ISAs: at a glance
- What do I need to know? Premium Bonds and ISAs can offer protection and tax-free returns on money you save.
- What does it mean for me? Premium Bonds and ISAs each have contribution limits and return money in different ways.
- Why does it matter? Understanding the rules around Premium Bonds and ISAs can help you balance your portfolio in a way that reflects your financial goals.
Premium Bonds and Individual Savings Accounts (ISAs) represent two tax-free savings opportunities in the UK. But they come with different rules, allowances, and tax considerations.
In this guide, you’ll learn about Premium Bonds and ISAs, how they work, and how they could form a valuable part of a balanced portfolio for growing and gifting wealth.
What is the difference between Premium Bonds and ISAs?
Premium Bonds and ISAs are both tax-efficient savings vehicles. But they differ in how they return money and your tax-free allowances.
Premium Bonds
National Savings and Investments (NS&I) issues Premium Bonds, which let you save money tax-free and enter monthly draws to win cash prizes. Winnings from Premium Bonds fall between £25 and a £1m prize, and are free from Income Tax and Capital Gains Tax.
NS&I caps your total Premium Bond holdings at £50,000 at any time. But you can withdraw and deposit money as many times as you like within this limit. HM Treasury backs Premium Bond investments, so there’s no risk of losing your money.
NS&I cashes out your Premium Bonds when you pass away. And HM Revenue & Customs (HMRC) considers these funds to form part of your estate for Inheritance Tax purposes. Your Premium Bonds remain eligible in the prize draws for up to 12 months after you pass away, though.
Individual Savings Accounts (ISAs)
HMRC lets you save up to £20,000 each year tax-free in ISAs. Using your annual allowance each year could help you increase your wealth through tax-free compound growth.
There are several types of ISAs that allow you to save your money, tax-free, in different ways. For example, Cash ISAs let you earn predictable interest, while Stocks and Shares ISAs let you invest your money in the stock market, potentially making significant tax-free profits. Lifetime ISAs (LISAs) offer government bonuses if you use your money for retirement or to buy a first home.
When you pass away, your spouse could inherit an Additional Permitted Subscription (APS). An APS lets spouses save the money they inherit from a partner’s ISA tax-free, in addition to their annual allowance. ISA savings form part of your estate for Inheritance Tax purposes. However, only spouses or civil partners are eligible for the Additional Permitted Subscription (APS).
Premium Bonds vs. ISAs
Below, we compare the important features of Premium Bonds and ISAs.
Are Premium Bonds worth it?
Premium Bonds give you the opportunity to win up to £1m in tax-free prizes each month. These prizes could represent one of the largest tax-free gains available to UK savers. HM Treasury also offers full protection over your Premium Bonds, so there is no risk of losing your money.
But there are no predictable returns with Premium Bonds. And the fact that you earn no interest on your Bonds means the purchasing power of your holdings could erode over time.
From the July 2026 draw, the Premium Bond prize fund rate is 3.80%. And this is only an average across all holdings, so you’re likely to earn less than this. At this rate, Premium Bonds could return less than some traditional savings accounts.
Are ISAs worth it?
The annual £20,000 tax-free ISA allowance could allow you to increase your wealth significantly through compound growth.
As everyone has their own ISA allowance, ISAs can form part of a wider tax-efficient savings strategy, although most ISAs remain within your estate for inheritance tax purposes.
Each child also has a £9,000 Junior ISA (JISA) allowance. Anyone can contribute to a JISA, allowing savings and investments to grow free from UK income tax and capital gains tax.
But from 06 April 2027, your annual Cash ISA allowance will decrease to £12,000 - although you can still make up the difference using other accounts, like Stocks and Shares ISAs. This reduction only applies if you’re under 65, and those aged 65 and over keep the full £20,000 Cash ISA allowance.
While Cash ISAs provide predictable interest returns, Stocks and Shares ISAs are riskier and you could even lose money. But as with any stocks or shares investment, you could stand to achieve more significant growth than savings interest.
Is it better to save money in Premium Bonds or ISAs?
Individual tax-free allowances mean you don’t have to choose between either Premium Bonds or ISAs. Saving money in Premium Bonds and ISAs as part of a balanced portfolio could provide predictable growth, immediate access to funds, and even an opportunity to gift money tax-free.
Both Premium Bonds and ISAs have a per-person allowance, too. This means couples can save up to £40,000 tax-free each year in ISAs while increasing their number of tax-free prize draw entries with up to £100,000 in Premium Bonds.
You may even choose to adjust your portfolio throughout your life. For example, you may prefer to hold more money in Stocks and Shares ISAs or other riskier investments in younger years to prioritise growth. In your golden years, you may choose to maximise your Premium Bonds allowance to focus on protecting your money as you look towards gifting to younger generations
Frequently asked questions about Premium Bonds and ISAs
1. What is the downside of Premium Bonds?
Premium Bonds provide no guaranteed returns. HM Treasury backs your investment, and you could win in monthly prize draws, but there are no predictable returns to grow your money. This could mean your money loses purchasing power to inflation if you leave it in Premium Bonds long term.
2. Where should you put £20,000 in savings in the UK?
How you save £20,000 will depend on your desire for protection and growth. You can save up to £20,000 tax-free each year in ISAs, although HMRC will reduce your Cash ISA allowance to £12,000 each year from 06 April 2027. Using your full annual ISA allowance from this date may mean investing your money in a Stocks and Shares ISA, and you could risk losing money. Saving £20,000 in Premium Bonds means HM Treasury backs your full investment.
Protect and grow your wealth with tax wrappers
Using your tax-free Premium Bond and ISA allowances could let you grow your wealth without increasing your tax bill.
And you don’t have to choose between either Premium Bonds or ISAs. Independent tax-free allowances mean you can save more of your money, and earn returns and prizes, without increasing your tax bill.
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