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Are Premium Bonds Tax Free?

Written by, Marija Petkova

Updated April, 17, 2022

Premium Bonds are the biggest savings products in the UK and for a good reason. They are offered by the National Savings and Investment (NS&I) and allow everyone to win a hefty prize.

But, are premium bonds tax free, how do they work, and how safe are they?

Let’s dive in.

What are Premium Bonds in the UK?

Premium Bonds are a type of investment that gives you the opportunity to get monthly tax-free prizes

Rather than receiving a guaranteed interest for keeping your money in your savings account or a regular dividend income, you enter a prize draw and have the chance to win cash prizes between £25 and £1m every month.

The minimum Premium Bonds you can buy is £25, while the Premium Bonds maximum amount is £50,000. 

Premium Bonds do not pay interest, but there is a 1% annual interest rate that’s used to finance the prize draw. 

Premium Bonds are not the right choice for you if you’re looking for a regular income or guaranteed returns. They are a great choice if you want to make the most out of tax-free investments.

You may be interested: What Is Robo-Investing?

They are not protected from inflation but, unlike with other investments and saving accounts, it’s way easier to get and invest into a saving bond UK account for your child.

Although Premium Bonds are a fun way to save money that gives you easy access to your savings account, the chances of winning are slim. In fact, the Premium Bonds odds for the lowest award are 1 in 34,500.

Are Premium Bonds tax-free? 

Premium Bonds do not guarantee a return or income of any amount but they’re also tax-free. This means that you won’t have to pay any additional taxes on the interest you earn from your investment.

Keep in mind that this only benefits certain people since most Brits have Personal Savings Allowance that allows them to skip interest tax on their savings.

Pros and Cons of a Premium Bonds investment

Investing in premium bonds can be a great way to earn tax-free interest on your investment, but there are also some risks to be aware of.

Pros:

  • Tax free bonds
  • High-risk, high-reward investment
  • You can buy Premium Bonds for people under the age of 16
  • The minimum purchase amount is  £25

Cons:

  • The odds of winning are relatively low
  • The value of your investment may decrease due to inflation
  • No guaranteed returns or income

Premium Bonds vs ISA

A fixed-rate bond is the best option if you’ve already hit your ISA deposit cap of £20,000 or if you want a guaranteed return on a lump sum that you can store until the end of a certain period. 

If you believe you will need to access your money in the future, an ISA (Individual Saving Account) may be a better option.

How Do I Buy Premium Bonds in the UK? 

You can buy Premium Bonds from the NS&I either online or over the phone, or via the Post Office. 

Anyone buying government Premium Bonds has to be 16 or older. You’ll need to provide a name, address, date of birth, and national insurance number.

If you buy Premium Bonds for a person under the age of 16, their guardian or parent will be in charge of the account until the child turns 16. When they do, they will receive a letter from the NS&I to register so they can take over the bonds. 

Those living outside the UK can purchase Premium Bonds via mail, provided that the country they live in allows it. If they win a prize, they can have it transferred to their international bank account.

What is the best time to buy premium bonds?  

You have to keep the bonds for a whole month before they are eligible to win. If you buy bonds in January, they’ll be in the draw in March.

If you’re moving money from another account, it’s preferable to do it during the last week of the month, since that way the money will not accrue interest and will not be eligible for Premium Bonds.

How Can I Sell My Premium Bonds?

You can sell your Premium Bonds by mail, over the phone, or online. 

How to cash in Premium Bonds?

If you decide to take your chances and invest in Premium Bonds, you can get a price-checker app to keep track of the monthly prize draw. The app will flag any winnings in the last six months and any past unclaimed Premium Bond prizes.

There are three ways to cash in your prize: transfer them to your bank account, reinvest the winnings, or have it sent via post. You can also cash in your child’s Premium Bonds.

Anyone who has invested in Premium Bonds can cash out them at any given moment, without having to pay a fee or a penalty. All they need is the holder’s number, bank account, and Bond record.

If you want to cash in your child’s Premium Bonds, take a look at this helpful article that will guide you through the process.

How Does the Prize Draw Work?

The way the prize draw works is that for every £1 invested, you get a bond number, each of which has a chance to win a prize.

The winner of the monthly prize draw is determined by Ernie, the NS&I’s “Electronic Random Number Indicator Equipment” – a computer that generates random numbers and compares them to eligible bond numbers to pick the winners. 

Prizes are announced in writing, or in-person if you win the jackpot.

What happens if you win high-value prizes?

  • Prizes of £5,000 or more

If you win a prize of £5,000 or more the NS&I will send you a claim form. You’ll need to fill it in and send it back to claim your prize.

  • Winning the jackpot

If you win  £1m, NS&I’s Agent Million will deliver the good news in person.

Are old premium bonds ignored in the prize draw?

Regardless of their issue date, all bonds are eligible for each month’s draw as long as you have kept them for a full calendar month after buying them. For example, a bond purchased in 1959 won the grand prize in July 2004.

How Safe Are Premium Bonds? 

Premium bonds are issued by the NS&I which is backed by the HM Treasury. Premium Bonds are also regulated by the Financial Conduct Authority, meaning that all money you invest is safe. 

Bottom Line 

Premium Bonds are a great saving tool if you’re looking to win tax-free prizes. They’re not suitable for people who are looking for guaranteed returns or income but are excellent for those that want to make the most out of their savings, with the opportunity to win a cash prize of up to £1 million.

                           

Frequently Asked Questions And Their Answers

How do I purchase premium bonds?

You can buy Premium Bonds from NS&I online, over the phone, or by post. You can also purchase Premium Bonds for your child or grandchildren.

Do old premium bonds ever win?

All Premium bonds have the chance to win a prize in every draw, regardless of when they were purchased. There have been cases where decades-old bonds have won hefty prizes.

How long does it take to cash in premium bonds?

According to NS&I, it can take up to three banking days for the money to transfer to your bank account. If you opt to receive it by post, it may take longer.

How much can you have in Premium Bonds?

You purchase a maximum of £50,000 in Premium Bonds.

Are premium bonds classed as savings?

Yes. Premium Bonds are a savings product. But, are Premium Bonds tax free like some other saving products? Yes, they are. You won’t have to pay taxes on any prize you win, though there is a limit on how much you can invest.