- With an ISA, you can grow your money tax-free by earning interest on cash and returns on investments, while Premium Bonds offer the chance to win tax-free prizes through monthly draws
- You can save up to £20,000 per year in adult ISAs, compared to a £50,000 total limit for Premium Bonds
- Premium Bonds have a variable average prize fund rate, but there’s no guarantee you’ll win anything
The debate comes up time and again. What's the better home for your hard-earned cash, Individual Savings Accounts (ISAs) or Premium Bonds? Both offer tax-free benefits, but work in fundamentally different ways. This article will run you through everything you need to know.
Are Premium Bonds better than ISAs?
The answer is: it depends on your circumstances. If you want to invest your money for a potentially higher return, a Stocks and shares ISA lets you do it tax-free. If you want to stick to cash, you could opt for a guaranteed return from a Cash ISA, while also protecting your interest from tax. Meanwhile, Premium Bonds could suit you if you’ve maxed out your ISA allowance or fancy a flutter with your savings while keeping your capital safe.
Understanding what an ISA is
There are five types of ISAs:
- Cash ISA
- Stocks and shares ISAs
- Lifetime ISAs
- Innovative Finance ISA
- Junior ISA
Depending on the type of ISA, you can earn interest on cash or choose to invest your money.
What are Premium Bonds?
Unlike a cash savings account, Premium Bonds don’t pay a guaranteed interest. Instead, you buy bonds that enter a monthly prize draw where you could win between £25 and £1 million. These prizes are tax free, but you might never win a penny. On the other hand, you won’t actually lose your money. It’s always protected with Premium Bonds, which are backed by the government.
Premium Bond winnings can be elusive for many. According to recent data, unless you’re willing to pay in larger amounts of cash you’re unlikely to win at all.
What are the similarities of ISAs and Premium Bonds?
Both ISAs and Premium Bonds offer tax-free benefits, making them attractive to UK savers. You don’t need to pay a penny in UK tax on interest earned in a Cash ISA, or prizes won with Premium Bonds. With a standard savings account, you’ll pay tax on the interest you earn once you’ve exhausted your personal savings allowance.
ISAs and Premium Bonds are both available to UK residents, though eligibility requirements differ slightly. Both products are offered by reputable institutions: ISAs through various providers, including AJ Bell's offering, and Premium Bonds exclusively through National Savings and Investments (NS&I). Your money is secure in either product, with some ISAs protected up to £120,000 per institution through the Financial Services Compensation Scheme (FSCS) and Premium Bonds backed by the government.
What are the differences between ISAs and Premium Bonds?
When comparing Premium Bonds and Cash ISAs, the differences become quite substantial once you look beyond the tax-free wrapper.
| Feature | ISA | Premium Bonds |
|---|---|---|
| Eligibility (age) | 18+, unless opening a Junior ISA for a child | From birth (parent/guardian manages until age 16) |
| Taxes | Tax-free on interest/gains | Tax-free on prizes |
| Residency | UK resident (some exceptions apply) | UK resident only |
| Withdrawals | Varies by ISA type | Access within seven working days |
| Maximum allowance | Up to £20,000 per tax year (Lifetime ISAs have a separate £4,000 limit counting towards the overall £20,000 allowance, Junior ISAs have their own £9,000 annual allowance) | £50,000 total holding limit |
The annual ISA allowance resets each tax year, letting you save up to £20,000 each year. Premium Bonds, however, cap your total holdings at £50,000. Once you hit that limit, you can’t add more. So if you’re saving for more than two to three years, you’ll be able to put more in ISAs.
Control is another major difference. With an ISA, particularly a Stocks and shares ISA, you decide where your money goes and can actively manage your investments. With a Cash ISA you can shop around for the top interest rate from a range of providers. Premium Bonds leave everything to chance. You can’t influence your returns beyond buying more bonds to improve your odds. The prize fund rate as of June 2026 stands at 3.8%, following a rate increase in May 2026.
Can I invest in both Premium Bonds and an ISA?
Yes. There’s no rule preventing you from holding both an ISA and Premium Bonds simultaneously.
What is the Premium Bond rate and how does it affect me?
While Premium Bonds don’t earn interest like cash accounts, the Premium Bond prize fund rate is calculated to give savers a similar figure to compare with. It’s based on the average winnings for the average saver, but isn’t a guaranteed rate and many savers will find they get back far less. The rate is determined by how much money NS&I distributes as prizes each month and the odds of winning. A higher rate means more prizes and better odds of winning, while a lower rate means fewer prizes overall.
Example
With £10,000 in Premium Bonds at a 3.8% prize rate, you’d expect average annual winnings of £380, though it can fluctuate. You could win nothing, or you could win substantially more. The odds of any individual £1 bond winning a prize in any monthly draw currently stand at 22,000 to 1.
Expert comment from Sarah Coles
“There will always be people drawn to Premium Bonds because of the vanishingly small chance of winning a life-changing sum of money, and for them the prize rate rising is a nice-to-have on a product they’re already committed to. However, if you have this money set aside for the long term, you need to bear in mind that in an average month, someone with average luck will still win nothing, so there’s a real risk of your money losing spending power after inflation. An AJ Bell Freedom of Information request found that fewer than 1% of Premium Bond prizes go to those holding less than £1,000."
Will I get a better return from ISAs or Premium Bonds?
The returns on your ISA savings depend on if and how you choose to invest. With a Cash ISA, you earn interest but the interest rate can vary and generally doesn’t increase as fast as inflation. With a Stocks and shares ISA you’re investing the money, with history showing us that investing has outperformed both cash and inflation over the long term. Though of course, past performance never guarantees future results.
Premium Bonds offer a varying average return, but it isn’t guaranteed.
Key considerations when choosing between ISAs and Premium Bonds
- Your financial goals. Are you looking to grow your wealth over time, or are you happy to have a chance of winning prizes?
- Your risk tolerance. Stocks and shares ISAs involve investment risk, where your money can go down as well as up, and you may get back less than you invested. Premium Bonds carry no investment risk; you'll always get back what you put in, but there’s the risk of receiving no return at all if you don't win any prizes. Cash ISAs are lowest risk, as your original savings are protected and you get a guaranteed return – but it’s likely to be lower than when investing.
- Your timeline. Stocks and shares ISAs are generally better suited for medium-to-long-term goals where you want your money to work harder. Cash ISAs and Premium Bonds can be better for short-term goals or money you don’t want to take any risk with.
- Your tax situation. Both offer tax-free returns, but with Stocks and shares ISAs you could potentially earn more through investment growth, and Cash ISAs will pay a guaranteed return. Premium Bonds rely entirely on luck.
- Your level of savings. If you want to stick to cash and you’ve exhausted your ISA limit, you might find yourself paying tax on the interest you earn on your cash. For higher and additional rate taxpayers this can be a decent amount of money, so you might decide to take your chances with Premium Bonds – despite the risk you could win nothing.
If you've used your full £20,000 ISA allowance for the tax year, Premium Bonds could be a tax-efficient place to put additional savings. Alternatively, if you want to invest, you could use a Dealing account, which lets you invest as much as you like beyond your ISA allowance, though any gains and income are taxable.
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Important information: Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser. These articles are for information purposes only.