What the Premium Bonds prize rate does and does not tell you about your return

Premium Bonds turn seventy this year, and more than 22 million people still hold them. Their appeal is easy to understand: the money is safe, the prizes are tax-free and every month there is a chance of something large. The harder question is what they actually pay.

National Savings and Investments (NS&I) raised the prize fund rate to 4.35% from the September 2026 draw, with odds of 21,000 to 1 for each £1 bond. That figure is easy to compare with a bank's interest rate. It is also easy to misread, because it describes the prize fund as a whole, not what an individual holder can expect. This article sets the two side by side.

How Premium Bonds work

Each £1 bond has a number that is entered into a monthly draw. Instead of paying interest, NS&I sets an annual prize fund rate that determines how much money goes into prizes, and the odds that determine how many prizes there are. Bonds must be held for a whole calendar month before they are eligible: buy in November and your bonds first enter the January draw. The capital itself is not at risk and you can cash in bonds when you want, but you only ever receive prizes, never interest.

A year of rate changes

The rate has moved several times in 2026, in line with the wider savings market.

Source: NS&I product page and press releases of 24 February and 18 August 2026. Both the rate and the odds are variable and can change at any time.

NS&I estimated that the September change would add around 308,000 prizes compared with August and lift the monthly prize pot by about £63 million to over £497 million. The number of £1 million jackpots stays at two a month.

Why the prize fund rate is not your return

The 4.35% is the size of the prize fund relative to all the bonds in the draw. It includes the two £1 million prizes and the other large prizes, which very few holders will ever win. Strip those out and the money most people actually receive in a year is below the headline rate. In any single month a holding can win nothing at all.

Holding size makes a difference to how lumpy the results are. With odds of 21,000 to 1, a £20,000 holding has on average about 11 chances of a prize a year, worked out from the published odds. A £1,000 holding has, on average, fewer than one prize a year.

How the tax treatment changes the comparison

Prizes are free of UK Income Tax and Capital Gains Tax. Interest from an ordinary easy-access account is taxable once it goes over your Personal Savings Allowance: £1,000 for a basic-rate taxpayer, £500 for a higher-rate taxpayer and nothing at the additional rate. People with low earnings may also have a starting rate for savings of up to £5,000. From April 2027 the tax rates on savings income are due to rise by two percentage points, to 22%, 42% and 47%.

So the comparison depends on your tax band and on how much other interest you already receive.

For a basic-rate taxpayer whose interest fits within the £1,000 allowance, tax makes no difference and a good easy-access rate delivers a known amount. For higher and additional-rate taxpayers, or anyone whose allowance is already used up by other savings, the tax-free nature of prizes counts for more. A tax-free 4.35% is equivalent to about 5.4% taxable at 20%, or about 7.3% at 40%, but only on the fund average.

Safety: Treasury backing versus FSCS

NS&I is backed by HM Treasury, so money in Premium Bonds is secure without a cap. Money in a bank or building society is protected by the Financial Services Compensation Scheme up to £120,000 per person per authorised firm. We explain that limit, and why some brands share it, in our article on deposit protection.

Who this matters for, and what to check

• Higher-rate taxpayers with savings above the ISA allowance often find the tax-free prizes useful. Crossing into that band is more common than it used to be, as our article on frozen thresholds explains.
• Savers who need a predictable income from their money may prefer interest they can count on.
• Small holdings can go many months without a prize.
• Cash ISAs also shelter interest from tax; from April 2027 the cash ISA limit is due to be £12,000 within the overall £20,000.

Check the current prize fund rate and odds on the NS&I website, compare like with like, and remember that Premium Bonds are not affected by Capital Gains Tax.

The takeaway

Premium Bonds are a secure place for money with a tax-free chance of prizes, not a source of reliable interest. The 4.35% prize fund rate is a fair way to compare the overall pot with bank rates, but your own result will usually be lower and is never guaranteed. The choice depends on your tax band, how much certainty you want and how much you already hold elsewhere.