Premium Bonds are a type of savings bond offered by National Savings and Investments (NS&I) in the United Kingdom. With Premium Bonds, instead of earning interest, you are entered into a monthly prize draw where you can win between £25 and £1 million tax-free.
Quick answer
Yes, all winnings from Premium Bonds are completely tax free. This includes the monthly prizes and any accumulated prize fund if you cash in your Premium Bonds.
Are Premium Bond winnings taxable?
No, Premium Bond winnings are not considered a form of income by HMRC, so they are completely tax free. This tax-free status applies to:
- Monthly prizes
- Accumulated prize funds if you cash in your Premium Bonds
It does not matter how much you win – whether it’s £25 or £1 million – you do not have to pay any tax on it. The prize money is paid gross into your bank account without any deductions.
Why are Premium Bond winnings tax free?
Premium Bond winnings are tax free because they are considered a form of gambling winnings, not income. The Premium Bonds themselves are taxable (more details below), but any winnings from the prize draws are tax free.
HMRC does not classify Premium Bond winnings as income for two main reasons:
- You do not know if you will win anything – it’s entirely based on chance.
- The amount you win each month is unpredictable.
Since there is no certainty or predictability around Premium Bond prizes, they do not meet the definition of taxable income. Gambling winnings are generally excluded from capital gains tax and income tax in the UK.
Are Premium Bonds themselves taxable?
Yes, Premium Bonds themselves are taxable. Even though you do not earn interest on them, HMRC still considers them a form of savings.
Specifically, Premium Bonds are subject to Capital Gains Tax. This means:
- If you cash in Premium Bonds at a profit, you may have to pay Capital Gains Tax on any gains above the annual allowance (£12,300 for 2022/23).
- Premium Bonds are subject to Inheritance Tax if they are passed on after death.
However, any monthly or accumulated prizes are still completely tax free.
Do you have to declare Premium Bond winnings?
No, you do not have to declare or report Premium Bond winnings on your Self Assessment tax return or anywhere else. Since the winnings are tax free, there is no requirement to report them to HMRC.
The only exception is if you run a business and use Premium Bonds as a business asset. In this case, you should declare winnings as business income. But for personal Premium Bonds held as an individual, there is no need to declare wins.
Can NS&I provide a tax certificate for winnings?
No, NS&I does not provide tax certificates or P60 forms for Premium Bond winnings. This is because the winnings are not classified as taxable income, so no tax is deducted.
However, NS&I will provide a statement of your Premium Bonds prizes if needed for your records. You can request this by phone or in writing.
Are there any other taxes on Premium Bonds?
Apart from Capital Gains Tax on the bonds themselves, the only other tax is Stamp Duty Reserve Tax. This applies when you purchase Premium Bonds:
- For bonds purchased electronically, there is no Stamp Duty Reserve Tax.
- For bonds purchased using cheque or cash, the Stamp Duty Reserve Tax rate is 0.5% of the purchase amount.
But once you own Premium Bonds, there are no other taxes applied to them or any winnings other than Capital Gains Tax when you cash them in at a profit.
Can you avoid Capital Gains Tax by gifting Premium Bonds?
Yes, you can legally avoid Capital Gains Tax on Premium Bonds by gifting them. If you gift your Premium Bonds to a spouse or civil partner, there is no Capital Gains Tax to pay. The spouse can then cash in the bonds tax free using their Capital Gains Tax allowance.
You can also gift Premium Bonds to anyone else, such as children or grandchildren. In this case, the purchase price carries over, so there is no taxable gain when the bonds are cashed in unless they have increased in value since you purchased them.
Are Premium Bond winnings taxed in an ISA?
No, Premium Bond winnings are still tax free if held within a Stocks & Shares ISA or other ISA wrapper. Although ISAs are taxable accounts, there is a special exemption for Premium Bonds held within them:
- Any Premium Bond prizes are paid out gross with no tax deducted.
- The bonds can usually be cashed in with no Capital Gains Tax to pay.
The tax benefits of Premium Bonds are maintained even inside an ISA. Just be aware they will count towards your total ISA allowance for the year.
Can you win Premium Bonds as a non-UK resident?
Unfortunately, Premium Bonds are only available to people who live in the UK. To buy Premium Bonds or be eligible for the prize draws, you must meet the following criteria:
- Be aged 16 or over
- Be a UK resident
- Provide a UK bank account and address
So if you move abroad or do not live in the UK, you cannot purchase new Premium Bonds. However, you can keep any existing bonds you already own.
As a non-UK resident, your existing Premium Bond winnings are still tax free. But cashing in the bonds themselves could be subject to Capital Gains Tax depending on your residency and changes in value.
Can you buy Premium Bonds for someone overseas?
No, you cannot buy Premium Bonds as a gift for someone who lives overseas. Just like the main bond holder, any additional bond holders must be UK residents with a UK address and bank account.
If you attempt to gift Premium Bonds to someone abroad, NS&I will reject the application when the non-UK address is provided during registration.
Conclusion
In summary, all winnings from Premium Bonds are completely tax free in the UK. This includes monthly prizes and accumulated prize funds when you cash in your bonds. The bonds themselves are subject to Capital Gains Tax if cashed in at a profit, but winnings are exempt.
You do not have to declare or report wins to HMRC. And Premium Bond tax rules apply even if held within an ISA. The tax-free winnings provide a nice benefit to Premium Bonds as a low-risk savings option for UK residents.
| Premium Bond Winnings | Taxable? |
|---|---|
| Monthly prizes | No |
| Accumulated prize funds | No |
| Premium Bonds themselves | Potentially – subject to Capital Gains Tax |
What are the odds of winning Premium Bonds?
The odds of winning any Premium Bonds prize are:
- £25 prize – 24,500 to 1
- £50 prize – 120,000 to 1
- £100 prize – 1.4 million to 1
- £1,000 prize – 140,000 to 1
- £5,000 prize – 56,000 to 1
- £10,000 prize – 280,000 to 1
- £25,000 prize – 1.7 million to 1
- £50,000 prize – 4.2 million to 1
- £100,000 prize – 8.4 million to 1
- £1 million prize – 420 million to 1
The more Premium Bonds you own, the higher your chances of winning. The average bond holder has around £3,500 worth of bonds. With this amount, your odds of winning any prize each month are about 24,500 to 1.
How are Premium Bond prize winners selected?
Premium Bond prizes are drawn at random using a process overseen by Ernst & Young. Here is how it works:
- A computer generates a series of random numbers equal to the number of eligible bonds.
- The random numbers are matched to bond holder numbers.
- The matched bond holders win prizes according to the prize structure.
- This process is repeated for each monthly draw.
No one at NS&I or Ernst & Young can influence the outcome. Premium Bond prizes are completely random based on the luck of the draw.
How many Premium Bonds can you buy?
As of 2022, the Premium Bonds purchase limits are:
- Minimum – £25
- Maximum – £50,000
Previously the maximum was £30,000, but it was increased in 2020. The minimum remains at £25.
You can continue to redeem bonds without limit. So over time you could accumulate more than £50,000 worth of Premium Bonds through reinvesting winnings.
How are Premium Bond prizes paid out?
Premium Bonds prizes are paid out in the following ways:
- Directly into your bank account – Most prizes are paid this way, directly into your nominated UK bank account. This happens automatically on the first of the month.
- Reinvested into new bonds – You can choose to automatically reinvest some or all of your winnings into more Premium Bonds.
- Premium Bonds voucher – For emergency prizes between £5,000 and £1 million, you’ll get a voucher to redeem at your bank.
Prize winners are notified by email or SMS text message. You can also check for wins using your NS&I account.
Do Premium Bonds expire?
No, Premium Bonds do not have an expiry date and can remain eligible for prizes indefinitely. Some key points on expiration:
- Premium Bonds remain valid and eligible to win prizes for as long as you hold them.
- There is no maximum term or fixed end date to your bond holdings.
- Bonds only become invalid if you cash them in fully.
So you can hold onto Premium Bonds long-term and they will never expire. However, be sure to keep your contact details with NS&I up-to-date so you do not miss out on prize notifications.
When did Premium Bonds launch?
Premium Bonds were first launched in November 1956 during Harold Macmillan’s tenure as Chancellor of the Exchequer. Here are some key dates:
- 17 April 1956 – Premium Bonds announced in the 1956 budget.
- 1 November 1956 – First Premium Bonds issued to the public.
- November 1957 – Monthly draws begin with first £1,000 jackpot prize.
- June 1994 – First £1 million Premium Bond jackpot won.
As of August 2022, there are over 22 million Premium Bonds holders with total bonds valued at over £131 billion.
How are unclaimed Premium Bond prizes handled?
If a Premium Bond prize winner cannot be contacted, there is a process to handle unclaimed prizes:
- The prize money is held for 3 months while attempts are made to contact the winner.
- If unclaimed after 3 months, the money is held for a further 9 months.
- After a total of 12 months, unclaimed prize money is reused in the prize fund for future draws.
To avoid missing out, bond holders should keep their contact details up to date. You can also choose to have prizes directly reinvested into buying more bonds.
Are Premium Bonds safe?
Yes, Premium Bonds are considered very safe for the following reasons:
- They are government-backed by NS&I, which is an Executive Agency of the Chancellor of the Exchequer.
- They are not investments, so your bond value does not fluctuate – you get back your original deposit when you cash them in.
- They are not subject to market risk. Your bonds are protected up to £85,000 under FSCS even in the unlikely event NS&I fails.
Premium Bonds are considered one of the safest places to store money long-term. The main risk is the lower returns compared to other investments.
What is the Premium Bonds prize fund rate?
The Premium Bonds prize fund rate determines your chances of winning. Currently it is set at 1.40%.
This means 1.40% of the total value of eligible Premium Bonds is used to pay out prizes each month. So the more bonds you have, the more chance you have of landing a prize.
NS&I regularly reviews and adjusts the prize fund rate. It was reduced from 1.40% to 1.00% in December 2020 as interest rates fell.
What are the alternatives to Premium Bonds?
Some alternatives to Premium Bonds for UK savers are:
- Normal savings accounts – Gain interest instead of prizes. Protect your savings up to £85,000 under FSCS.
- Fixed-term bonds – Lock away your money for 1 to 5 years to earn a fixed, guaranteed return.
- Stocks & Shares ISAs – Invest for potentially higher returns, but with investment risk.
- National Savings Certificates – Similar safe savings from NS&I with fixed returns.
Premium Bonds offer higher potential returns than normal savings but remain very safe. However, the returns are still lower than investing or locking money away longer-term.
Conclusion
Premium Bonds provide a tax-free way to potentially grow your savings with NS&I in the UK. All winnings are free of both Income Tax and Capital Gains Tax. You do not even need to report wins to HMRC.
The bonds themselves remain liable for Capital Gains Tax if cashed in profitably. But prizes are exempt as they are classified as gambling winnings, not investment income. This tax-free status gives Premium Bonds appeal over normal savings accounts.
To summarise the key points:
- Monthly and accumulated Premium Bonds prizes are completely tax free
- No tax reporting or declaration of wins is needed
- Premium Bonds can be bought easily from NS&I with a minimum of £25
- Maximum holdings of £50,000 per person allowed
- Prizes remain valid indefinitely as bonds do not expire
With interest rates low, the tax-free chance to win big makes Premium Bonds an attractive savings option for many UK savers today.
