What is NS&I Premium Bonds?
Government-backed bonds from National Savings & Investments where instead of earning interest, your money is entered into a monthly prize draw. The current prize fund rate is around 4.4%. Returns are tax-free, making Premium Bonds particularly attractive for higher-rate taxpayers who've used their PSA.
Premium Bonds are a savings product from National Savings & Investments, the state-owned savings bank, and are backed directly by HM Treasury — so there is no £120,000 FSCS cap to think about. Instead of paying interest, every £1 bond is an entry in a monthly prize draw, with tax-free prizes ranging from £25 to £1 million. The minimum holding is £25 and the maximum is £50,000 per person.
The advertised "prize fund rate" is the average payout across all bondholders, and NS&I moves it up and down broadly in line with UK interest rates. Actual returns are lumpy: because prizes come in discrete chunks, most holders — especially those with small balances — earn less than the prize fund rate in a typical year, while a lucky few earn far more. Larger holdings tend to land closer to the average.
The tax treatment is the main draw for savers comparing them with ordinary accounts: prizes are entirely tax-free and sit outside the Personal Savings Allowance. That makes the effective comparison rate higher for higher- and additional-rate taxpayers who have already used their PSA.