Premium Bonds Pay 3.30% to the Lucky and £0 to the Median Holder — A 4.51% Cash ISA Pays £902 a Year, Every Year

Premium Bonds: 3.30% prize fund rate, variable. Best easy-access cash ISA: 4.51%, guaranteed for the duration of the rate. Base rate: 3.75% since 18 December 2025.

The cash ISA is paying you 76 basis points over base. Premium Bonds are paying 45 below. On a £20,000 holding that gap is £242 a year. Over a decade with neither product compounding meaningfully, that is £2,420 of foregone interest — and that is if the median Premium Bond holder gets the headline 3.30%. They don't.

The 3.30% number is an average across all bond holders, weighted by the size of holdings. A £100,000 holder (impossible — the cap is £50,000) might get close to 3.30% in a long enough run. A £1,000 holder will not.

NS&I's own page puts the odds at 23,000 to 1 for every £1 bond per monthly draw. Run the math.

A £1,000 holding is 1,000 entries per draw, 12,000 entries per year. Expected number of prizes: 12,000 / 23,000 = 0.52 prizes a year. Expected — not guaranteed. The actual distribution is binomial: roughly 60% of small holders win one prize a year, 30% win nothing, 10% win two or more.

The median £1,000 holder, in plain English, wins £25 in a year. That is 2.5%, not 3.30%. The mean is dragged up by the small number of holders who win larger prizes. Half of £1,000 holders are below the median.

Only above £25,000 does the law of large numbers start to deliver returns close to the headline rate. Below that, you are paying 1.21 percentage points a year for a chance, not a return. That is a lottery ticket priced as a savings product.

The 2026/27 ISA allowance is £20,000, unchanged since 2017 and frozen until at least 2028. The allowance is use-it-or-lose-it. Every year you don't fill it is a year of tax-free wrapper space gone forever.

Put £20,000 in Premium Bonds and a corresponding £20,000 in a non-ISA savings account, and you have used precisely £0 of this year's ISA allowance. The interest on the savings account is taxable above the Personal Savings Allowance — £1,000 for basic-rate taxpayers, £500 for higher-rate, £0 for additional-rate.

For a basic-rate saver with £20,000 in a 4.51% non-ISA account, that is £902 of interest. £1,000 of it is tax-free under the PSA. They pay £0 in tax. So far, so equivalent. But the moment that saver adds another £25,000 of cash, suddenly £25,000 × 4.51% = £1,127 of additional interest, every penny of it taxable at 20%. The ISA wrapper would have shielded the first £20,000.

Over a decade, the gap is £4,490 — and that assumes the Premium Bond holder hits the expected return, which most don't. For more on compounding inside the ISA wrapper, see our ISA calculator and the /isa/ hub for the four ISA types.

The most-repeated Premium Bonds line: "the prizes are tax-free". So is every penny of interest inside an ISA. They are tax-equivalent products for the tax-free element — the cash ISA just pays 1.21 percentage points more.

For anyone whose total cash savings sit below their ISA allowance plus PSA, the tax-free claim is irrelevant. HMRC's guidance on tax on savings interest confirms that ISA interest is excluded from the PSA calculation — the wrapper is genuinely additive. The cash ISA dominates on rate alone.

For a higher-rate taxpayer with cash above the £500 PSA, Premium Bonds become slightly more competitive on tax — but only slightly. A £30,000 non-ISA holding at 4.51% earns £1,353 of taxable interest. £500 falls under the PSA; the remaining £853 is taxed at 40% = £341 in tax, leaving £1,012 net. A £30,000 Premium Bonds holding at expected 3.30% returns £990, tax-free. The cash ISA is still ahead, just barely — and only the saver who hits expected, not the median saver who hits zero.

The order of operations for the rational saver: max the cash ISA first, then PSA-covered savings, then Premium Bonds (only as the last resort for the £30,000+ saver who's run out of wrapper). For a wider take on tax-efficient savings, see the /tax/ hub. Premium Bonds belong at the end of the queue, not the front.

The other Premium Bonds defence: "you might win £1 million". Two £1 million prizes are paid out every month. The total prize fund has roughly 5.7 million prizes per draw against 109 billion eligible bonds. The headline odds of a single £1 bond winning the £1m jackpot in any given month are roughly 58 billion to 1.

A £50,000 holder — the absolute maximum — has 50,000 entries per draw, 600,000 entries per year, against ~109 billion eligible bonds. Their probability of winning the £1m in any given year is roughly 1 in 91,000. Over 30 years, roughly 1 in 3,030. That is the optionality being sold. It is real but vanishingly small.

For that lottery ticket the £50,000 holder pays roughly 1.21 percentage points × £50,000 = £605 a year in foregone cash ISA interest — a £18,150 lifetime cost over 30 years. They can buy the same lottery exposure for £15 a week with a National Lottery subscription and keep the £50,000 earning 4.51%. The math doesn't work.

For more on the case for stocks & shares ISAs over cash, see Your 4.51% Cash ISA Won't Lose You a Penny — Stocks & Shares ISAs Can Lose You a Third and £20,000 in a 4.51% Cash ISA Becomes £31,048 in a Decade — The Same Money in Global Equities Becomes £47,347.

Premium Bonds are not worthless. They have a real, narrow place. Specifically:

• You hold £30,000+ in cash and have already used your £20,000 ISA allowance for the year.
• You're a higher-rate or additional-rate taxpayer who has used your £500 (or £0) PSA.
• You want the explicit, accepted lottery thrill of a tax-free £1m draw.
• You hold above the £120,000 FSCS deposit cap at any single banking licence and prefer NS&I's 100% HM Treasury backing for the excess.

That fourth case — above £120,000 of cash savings — is the only one where Premium Bonds are doing genuine work the cash ISA cannot match.

For the same-day counter-case — that Premium Bonds belong in the mix above the £20,000 ISA cap, particularly for higher-rate taxpayers — see Premium Bonds Pay Tax-Free Outside Your £20,000 ISA Allowance. For the saver with under £40,000 in cash, the order is: max the £20,000 cash ISA, hold £20,000 in a non-ISA savings account where the PSA covers the interest, and only consider Premium Bonds for the next £20,000+ they want to park. See the /savings/ hub for the full ladder of cash products.

Most Premium Bond holders inherited the habit. A grandparent bought £100 of bonds at a christening in 1985. The £25 prize cheque arrived once. The myth was set.

The math has moved. The base rate is 3.75%. The best cash ISA pays 4.51%. The Premium Bonds prize fund rate is 3.30% and the median small holder gets nothing. The next ISA deadline is 5 April 2027. By then, £20,000 in a cash ISA at 4.51% will have earned the holder £902, contractually. The same money in Premium Bonds will have earned, in expectation, £660 — and very possibly £0.

Move the money. The /isa/ hub covers the four ISA types and how to choose between them.

This article is for informational purposes only and does not constitute financial advice. Rates and tax rules change — verify current Premium Bonds prize fund rates with NS&I, current cash ISA rates with the providers directly, and your tax situation with HMRC or a qualified adviser. You should seek independent financial advice before making any investment decisions. Capital is at risk in inflation-adjusted real terms with all cash savings products.