Savings and investment information is for educational purposes only. The value of investments can go down as well as up. Cash savings up to £85,000 per person per institution are protected by the FSCS.
Contents
Both Premium Bonds and Cash ISAs offer tax-free returns on your savings. Here’s how to choose between them.
Read more: See our Isas guide for a complete overview of this topic.
Quick Comparison
Feature
Cash ISA
Premium Bonds
Returns
Guaranteed interest
Prize draw (variable)
Current rates
4-5% AER
4.35% prize fund rate (Sept 2026)
Tax
Tax-free
Tax-free
Annual limit
£20,000
N/A
Total limit
Unlimited over time
£50,000
Access
Instant (most)
1-2 working days
Minimum
Varies (often £1)
£25
Provider
Banks, building societies
NS&I only
How Cash ISAs Work
Guaranteed Returns
You deposit money and earn interest at an advertised rate.
Deposit
Rate
After 1 Year
£10,000
5.00%
£10,500
£10,000
4.50%
£10,450
£10,000
4.00%
£10,400
You know exactly what you’ll earn.
Tax-Free Interest
Situation
ISA Benefit
Any taxpayer
All interest tax-free
Higher/additional rate
Most valuable (no tax on what would be taxed at 40%+)
Annual Allowance
Tax Year
ISA Allowance
2025/26
£20,000
Previous year’s ISA
Doesn’t count against new allowance
Total in ISAs
Unlimited over time
If you’ve used ISAs for 20 years at £20,000/year, you could have £400,000+ tax-free.
How Premium Bonds Work
Prize Draw System
Instead of interest, your bonds enter a monthly prize draw:
Prize
Odds Per Bond
£1,000,000
1 in 50+ billion
£100,000
1 in 10+ billion
£50,000
1 in 5 billion
£25
Much higher
Nothing
Most bonds
Prize Fund Rate
Current Rate
What It Means
4.35% (Sept 2026)
Total prizes = 4.35% of all bonds
Not guaranteed
NS&I can change it
Distribution varies
Some win big, many win nothing
Expected Returns Reality
Holding
Expected Annual Return
Reality
£1,000
£43.50
Might win £0-£100+
£10,000
£435
Might win £100-£800 typically
£50,000
£2,175
Should win consistently but variable
Larger holdings = more consistent returns due to more bonds in each draw.
Returns Comparison
Guaranteed vs Variable
£10,000 Savings
Cash ISA (5%)
Premium Bonds
Year 1 expected
£500
£435 (but variable)
Year 1 possible
£500
£0-£1,000+
Certainty
100%
0%
Over Time
Investment Horizon
ISA Advantage
Premium Bonds Advantage
1 year
Certainty
Potential upside
5 years
Compound interest
Million-pound chance
20 years
Known outcome
Tax-free growth, prizes
Tax Comparison
Cash ISA Tax Treatment
Taxpayer
ISA Interest
Outside ISA
Basic rate
Tax-free
First £1,000 free (PSA)
Higher rate
Tax-free
First £500 free (PSA)
Additional rate
Tax-free
No PSA — all taxed
Premium Bonds Tax Treatment
Taxpayer
Prize Tax
Basic rate
Tax-free
Higher rate
Tax-free
Additional rate
Tax-free
Both are equally tax-efficient — no tax at all on returns.
Access and Flexibility
Cash ISA Access
ISA Type
Access
Easy access
Instant withdrawal
Notice ISA
30-90 days notice
Fixed rate
Locked for term
Premium Bonds Access
Action
Timeframe
Request withdrawal
Online or phone
Money received
1-3 working days
No penalty
Ever
Premium Bonds: always flexible, no penalties.
Investment Limits
Cash ISA Limits
Rule
Limit
Per tax year
£20,000
Per provider
Usually no max
Total lifetime
Unlimited
Transfers
Allowed between providers
Premium Bonds Limits
Rule
Limit
Minimum purchase
£25
Maximum holding
£50,000
Per person
£50,000 total
Joint holding
Not available
Once you hit £50,000, you can’t buy more Premium Bonds.
Who Should Choose Cash ISA?
Situation
Why Cash ISA
Want guaranteed returns
Know exactly what you’ll earn
Have more than £50,000
ISA has no upper limit
Want best current rates
Top ISAs may beat Premium Bonds
Need money for specific date
Certainty matters
Higher rate taxpayer
Tax-free certainty valuable
Who Should Choose Premium Bonds?
Situation
Why Premium Bonds
Enjoy the prize draw
Entertainment value
Already used ISA allowance
No annual limit
Want NS&I government backing
100% secure
Large lump sum
More consistent prizes
Risk-tolerant
Happy with variable returns
Using Both Together
Example Strategy
Account
Amount
Purpose
Cash ISA
£20,000
Guaranteed 5% = £1,000/year
Premium Bonds
£30,000
Fun + ~£1,400 expected prizes
Total
£50,000
~£2,400 tax-free
Benefits:
£1,000 guaranteed from ISA
Lottery-style excitement from Premium Bonds
Some chance of big win
All 100% tax-free
FSCS Protection Comparison
Account
Protection
Cash ISA
FSCS: £120,000 per bank
Premium Bonds
HM Treasury: 100% backed
Premium Bonds offer unlimited government backing; ISAs are protected up to £120,000 per banking licence.
When Premium Bonds Underperform
Small Holdings
Amount
Issue
£100
Might win nothing for years
£500
Very inconsistent
£1,000
Still highly variable
You need £5,000+ for reasonably consistent prizes.
Prize Fund Rate Changes
NS&I adjusts the prize fund rate based on Bank of England rates:
If Interest Rates Fall
Premium Bonds
Prize fund rate drops
Fewer/smaller prizes
ISA rates drop
Your fixed ISA rate unchanged
Locked-into a good ISA rate beats variable Premium Bonds if rates fall.
Current Best Rates
Top Cash ISAs (indicative, March 2026 — confirm current rates before opening)
Provider
Rate
Type
Trading 212
5.10%
Easy access
Chip
4.75%
Easy access
Zopa
4.65%
Easy access
Rates shown are as of March 2026 and change frequently — always check the provider’s current rate before opening an account.
Premium Bonds
Metric
Current
Prize fund rate
4.35% (Sept 2026, confirm current)
Odds per £1 bond
21,000 to 1 (monthly)
Cash ISAs currently offer slightly higher guaranteed rates.
Making the Decision
Choose Cash ISA If:
Priority
ISA Advantage
Certainty
Guaranteed returns
Long-term maximisation
Compound growth
Large savings (>£50k)
No upper limit
Best current rate
May beat Premium Bonds
Choose Premium Bonds If:
Priority
Premium Bonds Advantage
Government backing
100% secure
Million-pound chance
Life-changing potential
£50,000+ savings
After ISA allowance
Fun/excitement
Prize draw psychology
Choose Both If:
Situation
Split Approach
Have £30,000+
ISA for guarantee, PB for fun
Like variety
Best of both worlds
Uncertain about future
Hedge your bets
Summary
Factor
Cash ISA
Premium Bonds
Best for certainty
✓
Best for upside
✓
Best for £50,000+
✓
Best backing
✓ (Treasury)
Current return
~5% guaranteed
4.35% variable (Sept 2026)
Tax status
Tax-free
Tax-free
For most savers, Cash ISAs offer better value due to higher guaranteed rates. But Premium Bonds make sense for those who’ve used their ISA allowance, want 100% government backing, or enjoy the prize draw experience.