Could Premium Bonds help you reduce a potential Capital Gains Tax bill?

Ever since their inception in 1956 to raise funds for the government, Premium Bonds have given savers a unique way to generate returns on their wealth through tax-free prizes.

Today, they’re relatively widespread in the UK. IFA Magazine reveals that around 22.7 million people hold Premium Bonds, making them one of the country’s most popular savings products.

Overall, there is £127.7 billion sitting in Premium Bonds, with the average holder owning £5,406.

It’s essential to note that Premium Bonds offer several benefits and have some notable considerations to keep in mind. Yet, one aspect of them you may have overlooked is their tax-free status.

Continue reading to discover how Premium Bonds work and whether they could potentially help you reduce a Capital Gains Tax (CGT) bill.

Premium Bonds allow you to enter the draw for a monthly cash prize

As mentioned, National Savings and Investments’ (NS&I) Premium Bonds are a unique form of savings vehicle that allows you to invest your money with the possibility of winning cash prizes from a monthly draw.

Rather than generating guaranteed interest, as is the case with savings accounts, you purchase bonds in £1 increments, with a minimum investment of £25 and a maximum holding limit of £50,000.

For each £1 bond you own, you’re entered into a monthly draw for a chance to win cash prizes ranging from £25 to £1 million.

The more you hold, the higher your chances of winning are. However, it’s vital to remember that your odds are statistically slim.

MoneyWeek reveals that the prize rate currently stands at 3.8%, and the odds of winning for each £1 bond you buy stand at 22,000 to 1.

Despite this relatively low win rate, there’s absolutely no risk involved. You can withdraw your money at any time, and they’re treasury-backed, guaranteeing the safety of your invested money.

That said, it’s essential to understand their limitations. There’s absolutely no guaranteed return, and some people actually never win anything.

In fact, the source above states that nearly two-thirds of Premium Bond holders have never won a prize.

Moreover, more than £4.25 billion currently sits in accounts that have had no activity over the last decade, earning no returns and losing real-term value due to inflation.

Any cash prizes from Premium Bonds are entirely free from Capital Gains Tax

One of the more practical – and possibly overlooked – benefits of Premium Bonds is their tax efficiency, particularly in relation to CGT.

You will usually pay CGT on the profits you earn from selling assets, such as property that isn’t your main residence, investments held outside of an ISA, and some alternative forms of investments, such as whisky or art.

Before you pay this, you can usually benefit from the “Annual Exempt Amount”. This allows you to make gains up to a certain value before you’re liable to face CGT. In the 2025/26 tax year, this exemption stands at £3,000.

This counts for each person, too. So, if you realised gains up to this threshold and your spouse or partner did the same with assets held in their name, it would essentially combine your exempt amounts and allow you to realise profits up to £6,000 before needing to pay CGT.

CGT rates in the 2025/26 tax year are:

• 18% for basic-rate taxpayers

• 24% for higher- and additional-rate taxpayers.

But crucially, unlike other investments, any winnings you receive from Premium Bonds are entirely free from CGT and Income Tax.

This means they don’t count towards your Annual Exempt Amount at all, so you could use Premium Bonds to potentially generate returns without using up your allowance.

Effectively, this allows you to preserve your CGT exemption for gains from other assets.

For example, if you’ve already used your £3,000 exemption for the tax year by selling shares, any further gains would trigger a tax charge.

However, if you also hold Premium Bonds and win a prize, that amount is still tax-free.

This could be particularly beneficial if you’re searching for ways to manage your tax liability in retirement.

It’s vital to take a balanced approach regardless

While they are tax-efficient, it might be prudent to avoid replacing other investments or savings with Premium Bonds entirely.

Their lack of guaranteed returns and the relatively low odds of winning mean you might achieve more competitive long-term growth from other sources of wealth, especially if you’re comfortable taking on some risk.

This is why it’s vital to view Premium Bonds as one part of a diversified portfolio. You could, for instance, use them alongside your ISAs or pensions, each helping you work towards different goals.

In some cases, Premium Bonds could be practical if you’re looking to hold cash but would like to give it the chance to work harder tax-efficiently.

Indeed, if you’re planning on selling an asset in the near future, Premium Bonds could help you do this while still potentially offering tax-free prizes.

Get in touch

We can help you decide whether Premium Bonds would be a tax-efficient way to work towards your long-term goals.

Email info@athertonyork.co.uk or call us on 0208 882 2979 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate NS&I products or tax planning.