Premium Bonds vs ISA: All you need to know

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While both products are considered tax-efficient savings accounts, Premium Bonds don’t offer guaranteed interest in the same way an ISA does. Instead, your money is entered into a monthly prize draw. On this page, we explore further differences so that you can consider whether an ISA or Premium Bonds is right for you.

Please note, this is an informational page only. We do not offer ISAs at Raisin UK.

An individual savings account (ISA) is a tax-efficient savings vehicle in the UK. Savers aged 18 or over can save up to £20,000 per tax year into an ISA, and any interest they earn is completely tax-free. There are various types of ISAs to choose from, the most common being cash ISAs and stocks and shares ISAs*:

• Cash ISAs – You can choose from instant access or fixed-rate cash ISAs, with fixed-rate options typically offering higher interest rates.

• Stocks and shares ISAs – Here, you can use your ISA allowance to invest your savings in shares or bonds. This option comes with fees, but any capital gains or dividend income is tax-free, unlike outside an ISA (where the dividend allowance is just £500).
• Junior ISAs – If you are a parent, you can open a junior ISA for any child under 18. You can contribute up to £9,000 per tax year, with the child gaining access at 18. Any gains are tax-free.

Premium Bonds are a savings product issued by the UK government-backed National Savings and Investments (NS&I). Rather than receiving interest, savers’ Bonds are entered into a monthly draw with the chance to win cash prizes of between £25 and £1 million. The maximum amount of Premium Bonds you can hold is £50,000.

As with the tax-free gains on ISAs, any prizes you win on Premium Bonds are exempt from tax. The prize fund rate is variable, meaning it can change at any time, but savers are notified in advance.

If you are deciding between Premium Bonds or a cash ISA, for example, the main difference lies in how (and whether) you make a return on your cash. Both offer tax-free gains, but savers can make gains in different ways. With most cash ISAs, you’re guaranteed to earn at least some interest. While variable-rate ISAs can be affected by changes to interest rates, you’ll still receive a return.

The only outlier here are stocks and shares ISAs, as investing your money never comes with the guarantee that you’ll make a return.

But if it’s a choice between Premium Bonds or a cash ISA, the essential difference is that Premium Bonds put bondholders into a monthly prize draw. Some winners get big cash prizes, but many receive nothing, often leading to lower returns overall compared to an ISA or regular savings account.

Comparing the pros and cons of an ISA vs Premium Bonds can help you decide which is the better choice for you

While tax-free interest can be a draw for both options, it’s also important to look at features such as access to your funds, safety, and deposit limits. If you can’t decide between an ISA or Premium Bonds, this table outlines the advantages and disadvantages.

When weighing up the merits of Premium Bonds vs. ISAs, most savers want to know which makes your savings grow more. 

The key point to note is that Premium Bonds simply offer a prize fund rate, which can’t be compared with savings interest. The prize fund rate – which is 3.80% in April 2025** – represents the average return across all bondholders. However, since prizes are randomly allocated, your actual returns could be much higher (or nothing at all).

ISAs offer more certainty, particularly fixed-rate ISAs, where you know in advance exactly how much interest you’ll earn. And these fixed rates often come with compounding, where your interest earns interest, growing your savings even faster. Comparing a cash ISA vs Premium Bonds, on other hand, what might have started as a competitive rate on a cash ISA may quickly become less attractive if interest rates fall.

To illustrate the difference with Premium Bonds vs ISAs: if you invest £10,000, the 3.80% Premium Bonds prize rate could see your savings grow to £10,380 – but only if you happen to win prizes matching that rate. A cash ISA offering 5.00% AER, however, would give you £10,500 after a year, with no luck required.

ISAs differ widely in terms of rates and withdrawal options. If you’re weighing up Premium Bonds vs ISAs, it’s important to consider a few key points:

• Goals – Think about what you want to achieve with your savings. Do you have a specific savings goal in mind, and is it a short-term or long-term goal? How much do you still need to save to reach your goals? Premium Bonds may be less suited to specific targets, as you might not win any prizes.

• Risk/reward – You might think about your appetite for risk, particularly if you’re considering Premium Bonds or stocks and shares ISAs. Premium Bonds may be at the lower end of the risk scale, but the returns are generally lower (or non-existent) as a result. With stocks and shares ISAs, while investments have the potential to grow beyond what a traditional account offers, there’s also the chance of losing all your money.

• Access to money – When will you need your savings? Both Premium Bonds and instant access cash ISAs let you withdraw your money whenever you need it. When choosing Premium Bonds or stocks and shares ISAs, it’s worth keeping in mind that investments of any kind are generally meant for the long-term. Some experts say a term of at least five years is necessary to ride out any ups or downs in the markets.

And remember, it’s not just about Premium Bonds or ISAs; when making your decision, it can help to compare savings accounts, too. That way, you have a complete overview of your options. Explore more in Premium Bonds or savings accounts.

Yes, it’s not always an either-or decision between an ISA vs Premium Bonds. Some people opt for Premium Bonds when they’ve already used up their annual £20,000 ISA allowance in any given tax year and have more they want to save tax-efficiently.

That said, it might be worth exploring other savings accounts too. Many savers benefit from the personal savings allowance, which lets basic rate taxpayers earn up to £1,000 in interest tax-free, while higher-rate taxpayers can earn up to £500. 

Of course, since Premium Bond prizes are tax-free, they may be more appealing to additional rate taxpayers, who have no PSA and would have to pay 45% tax on savings interest. Otherwise, a high-yield savings account may offer a better return.

If safety is your main concern, you’ll want to think about how your funds are protected. As a savings vehicle supported by the UK government, your funds are safe in Premium Bonds. You’ll always be repaid your initial investment and any prizes you’ve reinvested.

As for ISAs, they are as safe as any other typical savings account. Provided you choose an account with an authorised bank or building society that offers FSCS deposit protection, your money (up to the applicable limit) will be shielded in the event that the financial provider collapses.

Although we don’t offer ISAs at Raisin UK, you can compare and open other types of savings accounts from our partner banks and building societies. Whether you’re looking for an easy access savings account, notice account, or fixed rate bond, you can find the best savings account for you by comparing interest rates, registering for a Raisin UK Account, and logging in to apply.

*https://www.gov.uk/government/statistics/annual-savings-statistics-2024/commentary-for-annual-savings-statistics-september-2024

**https://nsandi-corporate.com/news-research/news/new-interest-rates-selected-nsi-accounts#