Premium Bonds Jump to 3.80% in July: At That Rate, the Cash ISA Is No Longer the Default Above £20,000

Premium Bonds paid 3.30% from the March 2025 draw. For 16 months, the gap between the prize fund rate and the best cash ISA averaged roughly 1.2 percentage points. That gap made the case for Premium Bonds tax-dependent: competitive only for higher-rate taxpayers above their Personal Savings Allowance.

At 3.80% from July, the math shifts for everyone. The Personal Savings Allowance gives basic-rate taxpayers £1,000 of tax-free interest and higher-rate taxpayers £500. Additional-rate taxpayers get nothing. A non-ISA easy-access account at 4.51% looks like this after tax:

• Basic-rate (20%): 4.51% × 0.8 = 3.61% net on interest above £1,000 PSA
• Higher-rate (40%): 4.51% × 0.6 = 2.71% net on interest above £500 PSA
• Additional-rate (45%): 4.51% × 0.55 = 2.48% net on all interest

At 3.30%, Premium Bonds only beat the after-tax non-ISA rate for higher and additional-rate taxpayers. At 3.80%, they beat the after-tax rate for basic-rate taxpayers too — 3.80% tax-free versus 3.61% net. That is a new development. The Premium Bonds expected return is now higher than the after-tax return on the best non-ISA easy-access account for every tax bracket above the PSA.

This is not a theoretical exercise. A higher-rate saver with £50,000 in cash outside an ISA earns £2,255 of interest at 4.51%. £500 is covered by the PSA. The remaining £1,755 is taxed at 40% — £702 gone. Net return: £1,553. The same £50,000 in Premium Bonds at 3.80% expected: £1,900 tax-free. That's £347 better off — a 22% improvement on the after-tax non-ISA position.

The 2026/27 ISA allowance is £20,000, unchanged since 2017. For a saver with £15,000 of total cash, the conversation begins and ends at the cash ISA. Fill it. Stop reading.

But the real saver — the one with £40,000, £60,000, or £100,000 in cash — has already filled the ISA. The remaining capital has to live somewhere. The options are limited and, at current rates, increasingly unappealing once tax is factored in.

From April 2027, the ISA allowance drops to £12,000 (over-65s retain £20,000). That makes the "above-allowance" problem bigger for millions of savers. An extra £8,000 a year that can no longer go into the tax wrapper. For a basic-rate taxpayer, that's £361 of additional taxable interest at 4.51%. For a higher-rate taxpayer, it's £361 of interest taxed at 40% — £144 gone. Premium Bonds absorb that excess without triggering a single line on a tax return.

The order of operations for a serious saver with £40,000 of capital, deciding what to hold in cash:

1. Decide how much should be in cash at all. Long-term savers should weight toward equities; cash is for emergencies and near-term goals.
2. Use the £20,000 ISA allowance. Most savers do best putting this in a stocks & shares ISA — see our argument in £20,000 in a 4.51% Cash ISA Becomes £31,048 in a Decade — The Same Money in Global Equities Becomes £47,347. The cash component goes outside.
3. Hold cash where the after-tax return is highest. Below the PSA, that's any easy-access account at 4.51%. Above the PSA, Premium Bonds at 3.80% tax-free now beat the after-tax non-ISA rate for all tax brackets.
4. For the saver who specifically wants a cash ISA for their cash allocation, use it — but hold Premium Bonds for the overflow.

The Financial Services Compensation Scheme protects £120,000 of cash deposits per authorised banking licence — raised from £85,000 in December 2025. For most savers, that is more than enough. For the saver holding £200,000 in cash — sale proceeds, inheritance, end-of-life simplification — the FSCS cap forces the awkward shuffle of accounts across multiple banking licences.

NS&I operates differently. It is backed 100% by HM Treasury — every penny, no cap. Premium Bonds cap at £50,000 per holder, Direct Saver at £2 million, Direct ISA at £20,000 per tax year. NS&I's marketing line is explicit: "Most banks only guarantee your savings up to £120,000. We're the only provider that secures 100% of your savings above this amount."

For the saver above £120,000, this matters. The rate gap on £50,000 of Premium Bonds at 3.80% versus a non-ISA account at 4.51% is 0.71 percentage points — £355 a year before tax, and for higher-rate taxpayers, Premium Bonds actually come out ahead after tax. The peace of mind of 100% government backing on £50,000 of capital is a genuine feature for anyone who remembers 2008, the 2023 US regional banking crisis, or the regular small-bank failures in the UK.

Premium Bonds are one of only two NS&I products that pay returns entirely outside the ISA wrapper while remaining tax-free. The other — the tax-free Savings Certificate family — has been closed to new investments for years.

For the saver who has already maxed the £20,000 ISA allowance on a stocks & shares ISA — which is what the long-term saver should do, given the historical real return of equities versus cash — Premium Bonds are the cleanest tax-free home for the cash component of their portfolio. Every pound there is sheltered from income tax on interest, sheltered from capital gains tax, and not counted against the PSA.

This becomes more valuable as the ISA allowance shrinks. From April 2027, the allowance drops to £12,000. That means £8,000 less per year that can go into the tax wrapper. Over a decade, that's £80,000 of contributions that would have been ISA-sheltered and now need a different home. Premium Bonds — at 3.80% tax-free, government-backed, no FSCS cap — fill that gap for the cash portion.

For more on the pensions-versus-ISA ordering, see Put Every Pound Above £50,270 Into Your Pension Before Your ISA Sees a Penny. For a broader view on cash allocation, the /savings/ hub lays out the current rate landscape.

Two £1 million prizes are paid out every month. The total prize fund distributes roughly 5.7 million prizes per draw across approximately 109 billion eligible bonds. The headline odds are long but well-defined.

A £50,000 holder — the maximum permitted — has 50,000 entries per draw, 600,000 entries a year. At the new odds of 22,000:1 from July, the expected number of prizes per year rises to approximately 27, up from 26 at the current 23,000:1 odds. The probability of any prize in a year approaches 100%. The probability of an unusually good year (45+ prizes) is around 6%. The probability of winning the £1m in any given year is roughly 1 in 83,000 — slightly improved from the current 1 in 91,000.

For most savers, the lottery component is a curiosity, not a reason to buy. For one specific buyer it is a real feature: someone with £50,000+ in cash above their ISA allowance, who is happy with the expected 3.80% tax-free, and who values the small but real chance of a tax-free £1m far more than the 0.71-percentage-point rate gap costs them.

The rational case is not "buy Premium Bonds because you might win £1m". It is "buy Premium Bonds because the expected tax-free return is now higher than the after-tax non-ISA return for every tax bracket above the PSA, and the £1m draw is a free option on top". That option has positive expected value over a long enough horizon.

For the counter-argument — that the median small holder wins nothing while the cash ISA pays reliably — see our companion piece: 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 belong in a portfolio in three specific situations. The July rate rise to 3.80% strengthens all three.

The above-allowance saver. Anyone with more than £20,000 in cash needs somewhere for the excess. Above the £500–£1,000 PSA, Premium Bonds at 3.80% tax-free now beat the after-tax non-ISA rate for basic, higher, and additional-rate taxpayers alike. This was not true at 3.30%.

The above-FSCS saver. Anyone with more than £120,000 in cash at a single banking licence runs counterparty risk. NS&I's no-cap government backing matters at this level. Premium Bonds absorb up to £50,000 of that excess — and at 3.80%, the expected return is now competitive enough that the safety premium isn't punishing.

The 2027 allowance refugee. From April 2027, ISA allowance drops to £12,000. Savers who currently max a £20,000 ISA will have £8,000 a year looking for a tax-efficient home. Premium Bonds are the only product on the UK retail market that offers tax-free returns outside the ISA wrapper with 100% government backing and no FSCS cap. This slot gets bigger every year.

For the /savings/ saver below £20,000 in total cash, the cash ISA at 4.51% remains the right answer. For everyone above that bar — and from 2027, that bar drops — Premium Bonds belong in the mix. Not as a substitute for the cash ISA, but as its complement above the ISA wrapper limit.

For more on the cash-versus-investments decision, see Cash or Investments? The 2026/27 Decision Framework Every Saver Needs.

A serious saver with £50,000 in cash should hold roughly:

• £20,000 in the highest-paying cash ISA (4.51% easy-access from Trading 212 or 4.73% fixed from Castle Trust Bank)
• £20,000–£30,000 in Premium Bonds, particularly if higher or additional-rate taxpayer — 3.80% tax-free from July beats the after-tax non-ISA alternative for every tax bracket
• Any remainder in a non-ISA easy-access account up to the PSA limit

This portfolio uses every tax shelter available, holds capital in the right wrappers, and gives the saver a meaningful stake in the £1m draw at no cost above the after-tax alternative. From April 2027, when the ISA allowance drops to £12,000, the Premium Bonds allocation in this portfolio should grow — the ISA absorbs less, so more capital needs a tax-free home.

The cash ISA evangelists who insist Premium Bonds are always wrong are arguing against a strawman. Premium Bonds are not competing with the cash ISA at the £20,000 level. They are competing with non-ISA savings at the £20,000+ level. At 3.80% tax-free, they win that comparison for all taxpayers above the PSA — not just higher-rate. That is new. That matters.

For the full case against Premium Bonds — that the median small holder gets nothing — see our debate companion: Premium Bonds Pay 3.30% to the Lucky and £0 to the Median Holder.

This article is for informational purposes only and does not constitute financial advice. Rates, tax rules, ISA allowances, and FSCS limits 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. The expected return on Premium Bonds is variable; actual returns depend on the prize draw and may be substantially below the headline 3.80% rate, particularly for smaller holdings. The ISA allowance reduction to £12,000 from April 2027 is announced government policy but could be amended before implementation. Past performance of any investment is not a guide to future returns.