Premium Bonds tax-equivalent yield: what gross savings rate beats a 3.80% prize fund for higher-rate taxpayers?

What the prize fund rate is and why it matters

Premium Bonds are a National Savings and Investments (NS&I) product backed 100% by HM Treasury. Holdings between £25 and £50,000 per person are entered into a monthly prize draw. All prizes are tax-free (NS&I, Premium Bonds).

The prize fund rate is the percentage of total bond holdings that NS&I pays out as prizes each year, in aggregate. From July 2026 the rate is 3.80% (NS&I, Premium Bonds). This is a mean: total prize money divided by total bonds in issue. An individual holder's actual return depends on how many prizes their bonds win, which is governed by the published odds.

The headline 3.80% is directly comparable to a savings account rate only if the saver's interest from that savings account is also tax-free in full. For most basic-rate taxpayers, the £1,000 Personal Savings Allowance (HMRC, Apply for tax-free interest on savings) covers a significant chunk of interest from a regular savings account. For higher-rate and additional-rate taxpayers with the PSA exhausted, the comparison shifts: every pound of taxable savings interest above the PSA is taxed at the marginal income tax rate. To match a 3.80% tax-free PB return, the saver needs a gross taxable rate that, after tax, lands at 3.80%.

The tax-equivalent yield calculation

The formula is: tax-equivalent gross rate = tax-free rate / (1 − marginal tax rate)

Applied to a 3.80% Premium Bonds prize fund rate:

Taxpayer band	Marginal rate	Tax-equivalent gross rate
Non-taxpayer (income below personal allowance)	0%	3.80%
Basic-rate taxpayer, PSA fully used (£1,000)	20%	4.75%
Higher-rate taxpayer, PSA fully used (£500)	40%	6.33%
Additional-rate taxpayer, PSA = £0	45%	6.91%
Scottish intermediate-rate taxpayer (21%), PSA used	21%	4.81%
Scottish higher-rate taxpayer (42%), PSA used	42%	6.55%
Scottish top-rate taxpayer (48%), PSA used	48%	7.31%

The Personal Savings Allowance is £1,000 for basic-rate taxpayers, £500 for higher-rate, and £0 for additional-rate (45% UK / 48% Scottish top) taxpayers (HMRC, Apply for tax-free interest on savings). The tax-equivalent calculation above assumes the saver has already exhausted their PSA from other taxable savings interest, which is the regime in which the calculation matters.

For a higher-rate taxpayer with the PSA exhausted: 3.80% tax-free PB return is equivalent to a 6.33% gross taxable savings rate. Best-buy easy-access non-ISA savings accounts at the time of writing sit closer to 4.5% gross per the MoneySavingExpert Best Cash ISA tables and parallel non-ISA tables. The gap (6.33% vs 4.5%) is the strongest mathematical case for Premium Bonds in any UK savings comparison today.

Worked examples

Saver A, higher-rate taxpayer, £50,000 in Premium Bonds, PSA exhausted by other savings:

• Expected mean annual prize return on £50,000: £50,000 × 3.80% = £1,900 tax-free
• To match this from a taxable savings account: needs gross interest of 6.33% on £50,000 = £3,165 gross, minus 40% tax on the portion above PSA = £1,899 net
• Conclusion: Premium Bonds at 3.80% are roughly equivalent to a taxable savings account paying 6.33% gross for this saver. Since no easy-access taxable account currently pays 6.33%, Premium Bonds beat the alternative on a like-for-like cash-allocation basis.

Saver B, basic-rate taxpayer, £30,000 in Premium Bonds, PSA partly used (£300 of £1,000 used):

• Of the PB return, £700 of the £1,140 expected mean prize return would still fit within unused PSA if it had been taxable interest
• Direct comparison: a taxable savings account paying 3.80% would give £1,140 gross, of which £840 is fully PSA-covered (no tax) and £300 is taxed at 20% = £240 net. Total: £1,080 net.
• Premium Bonds at 3.80%: £1,140 tax-free
• Conclusion: Premium Bonds win by £60 over a 3.80% taxable account for this saver, but a taxable account paying just 0.3 percentage points more (4.10%) would deliver the same net return after tax (3.28% net vs 3.80% net, applied to the full £30,000 minus the PSA-protected portion). The PB case is much weaker for a basic-rate taxpayer with significant unused PSA capacity.

Saver C, non-taxpayer (retired with income below £12,570), £20,000 in Premium Bonds:

• Expected mean prize return: £760 tax-free
• A taxable savings account at 3.80% would also deliver £760, all PSA-covered (£1,000 allowance unused)
• Conclusion: Premium Bonds match the taxable account exactly here. The only differentiators are NS&I's HM Treasury guarantee vs the £85,000 FSCS protection per institution on a high-street savings account, and the variance of the prize lottery vs guaranteed interest.

Calculate Your Savings Growth → (model compound interest at the equivalent gross rate to compare PB and taxable savings accounts over multi-year horizons.)

The variance question: mean vs median

The 3.80% prize fund rate is a mean across all bonds in issue. Because the prize distribution is heavily skewed toward a small number of large prizes (the £1 million top prizes, with millions of £25 prizes filling the bottom of the distribution), the median holder return differs from the mean, particularly for small holdings.

For a holder with £50,000 in bonds (the maximum), the statistical distribution converges close to the mean: the holder will win enough small and medium prizes across the year to land near 3.80% in most years.

For a holder with £1,000 in bonds, the variance dominates: the holder has roughly a 4.5% probability of winning at least one prize in any given month at the July 2026 odds of 22,000-to-1 per £1 bond (NS&I, Premium Bonds). Annual expected return is still £38 (1,000 × 3.80%), but the actual outcome in any given year is far more likely to be £0, £25, or £50 than the mean. Small holders should not expect to earn the prize fund rate; they may earn nothing for years before winning a prize that pushes them above the rate.

When Premium Bonds are NOT the right answer

The Premium Bonds case weakens or reverses for savers who:

• Are basic-rate taxpayers with substantial unused PSA capacity (the tax-equivalent calculation does not bite because they would pay no tax on the alternative anyway)
• Hold very small balances (under £5,000) where prize variance dominates and the mean return is unlikely to materialise in any given year
• Have unused Cash ISA allowance and prefer the certainty of a fixed savings rate over the lottery distribution
• Would benefit more from the £20,000 Cash ISA allowance (which is itself tax-free without the prize variance) before topping up Premium Bonds

The MoneyHelper Premium Bonds guide provides independent consumer guidance from MaPS on these trade-offs. The decision on whether to hold Premium Bonds is a personal one based on tax position, holding size, and preference for guaranteed vs lottery returns, not a question of editorial advice.

Frequently asked questions

What is the current Premium Bonds prize fund rate?

3.80% from the July 2026 prize draw onward (NS&I, Premium Bonds). The rate is set by NS&I and changes in response to broader interest-rate conditions; the historical range over the last five years has been 1.00% to 4.65%.

Are Premium Bonds prizes really tax-free?

Yes. All Premium Bonds prizes are exempt from UK Income Tax and Capital Gains Tax (NS&I, Premium Bonds). The prize value does not count toward the Personal Savings Allowance or any other tax allowance.

What is the Personal Savings Allowance and how does it affect the comparison?

The PSA is the amount of taxable savings interest a UK saver can receive each year without paying income tax. The thresholds are £1,000 for basic-rate taxpayers, £500 for higher-rate, and £0 for additional-rate (HMRC, Apply for tax-free interest on savings). The tax-equivalent yield calculation in this article assumes the PSA is already used up by interest from other sources; that is when the Premium Bonds comparison shifts most decisively in favour of PBs for higher-rate taxpayers.

Are Premium Bonds protected like savings accounts?

Premium Bonds are 100% backed by HM Treasury, not by the FSCS. The protection structure is different: the FSCS protects up to £85,000 per person per banking licence; Premium Bonds carry the full faith and credit of HM Government on the full holding up to £50,000.

Is the prize fund rate guaranteed?

No. NS&I sets the rate in response to broader interest-rate conditions and may change it (typically with 60 days notice). The 3.80% rate from July 2026 is the current published rate; future changes are announced via NS&I press releases.

Further reading

• NS&I Premium Bonds product page: rates, odds, eligibility, holding limits
• HMRC Apply for tax-free interest on savings: Personal Savings Allowance rules
• MoneyHelper Premium Bonds guide: independent consumer guidance
• MoneySavingExpert Premium Bonds page: rate history, current odds, and trade-off context