Premium Bonds vs Savings vs Credit Union

This article is general information, not financial advice.

"Safe savings" bundles three separate properties: whether the return is taxed, whether your money is protected if the provider fails, and whether the return is guaranteed. Each of these three products has a different mix.

• Premium Bonds: prizes are tax-free, all of your money is guaranteed by HM Treasury, and no return is guaranteed.
• A savings account at a bank or building society: interest is taxable above your allowance, money is protected up to £120,000 per person by the FSCS, and the rate is whatever the account says, fixed or variable.
• A credit union: interest or dividends are taxable above your allowance, money is protected up to £120,000 per person by the FSCS, and a dividend is paid from profit, so it is not guaranteed.

Premium Bonds: Tax-Free and Fully Backed, With No Return Promised

Premium Bonds pay no interest. Each £1 Bond is entered into a monthly prize draw, with prizes from £25 to £1 million, free of Income Tax and Capital Gains Tax. You can hold between £25 and £50,000, and a Bond must be held for a whole month before it joins a draw.

NS&I publishes an annual prize fund rate. At the time of writing (02/10/2026) it is 4.35%, variable, with odds of 21,000 to 1 for each £1 Bond in each monthly draw. That rate is what the prize fund pays out across all Bonds. It is an average over millions of holders, and NS&I can change it up or down. It is not what any one holder receives, and NS&I lists "guaranteed returns" under products Premium Bonds are not for.

The odds show how uneven it is. With £1,000 held for twelve draws you hold 12,000 chances at 1 in 21,000. The chance of winning nothing is (1 − 1/21,000) raised to the power of 12,000, about 56%. So in a little over half of years, £1,000 of Bonds wins nothing, while the headline rate is an average across every holder. The odds are also variable, so this is a guide, not a forecast.

The guarantee is separate from the prizes. NS&I is part of the government, and HM Treasury guarantees 100% of what you invest in it, not just the first £120,000 that the FSCS covers at a bank.

A Savings Account: Protected, and Taxable Above Your Allowance

Interest from bank and building society accounts counts as income. You can earn some tax-free: a Personal Savings Allowance of £1,000 for a basic-rate taxpayer, £500 for a higher-rate taxpayer and nothing for an additional-rate taxpayer. If your other taxable income is under £17,570 you may also have a starting rate for savings of up to £5,000. HMRC adds up the interest from all your accounts, and splits a joint account equally between the holders.

Take an illustrative 4% account. A basic-rate taxpayer reaches the £1,000 allowance at £25,000 of savings (£1,000 ÷ 0.04). A higher-rate taxpayer reaches £500 at £12,500. An additional-rate taxpayer is taxed from the first pound. Below those balances, if it is your only interest, a taxable account and a tax-free one cost the same tax, which is none. The tax-free status of Premium Bonds matters from the allowance upwards.

Protection comes from the FSCS. If a UK-authorised bank, building society or credit union fails, it pays up to £120,000 per eligible person per firm (the limit for firms failing after 30/11/2025), and joint accounts are covered up to £120,000 per eligible person. Brands that share one banking licence count as one firm. Certain qualifying temporary high balances are covered up to £1.4 million for six months.

A cash ISA is a different wrapper and uses your ISA allowance, which is £20,000 in total this tax year. Premium Bonds are not an ISA, so they do not. What is changing for cash ISAs from April 2027 is in the cash ISA cut and what replaces the Lifetime ISA.

A Credit Union: Protected, With a Dividend Instead of a Promise

A credit union is a financial co-operative owned by its members, regulated by both the FCA and the PRA. It takes deposits, offers savings and makes loans, and only to people who meet its common bond: living or working in an area, belonging to an organisation, or working for an employer.

• Savings are protected by the FSCS on the same terms as a bank: up to £120,000 per eligible person per credit union.
• A credit union may share its profits with members as a dividend. The FCA's wording is "may", so ask the union what it paid last year and treat the next one as an estimate.
• GOV.UK lists savings and credit union accounts among the interest that can be taxable, so the Personal Savings Allowance applies to a dividend or interest.
• Loans are ordinary borrowing with a rate and a term. A legal ceiling limits what a credit union may charge, but check the figure with the union and the FCA rather than from this article.

Where the Answer Changes

• More than £50,000 in Premium Bonds: Bond numbers above the limit are not eligible to win, and a prize paid on one in error can be reclaimed. The limit is per holder, and Bonds cannot be held jointly.
• Children: a parent or guardian looks after Bonds bought for a child under 16, and the child's own total is capped at £50,000. Anyone 16 or over with a UK bank account can buy their own.
• More than £120,000 with one provider: the excess is above the FSCS limit. Money across different banking licences is covered separately, but accounts under one licence share one limit. The Treasury guarantee on NS&I has no such cap.
• An additional-rate taxpayer: with no Personal Savings Allowance, tax-free prizes help from the first pound.
• A rate cut: NS&I says it can lower the prize fund rate, and will contact holders in advance if it does. A savings account rate can also change unless it is a fixed-rate account, which guarantees the rate for its term and typically limits withdrawals.
• Eligibility: Premium Bonds need a UK bank account and an age of 16 or over. A credit union needs you to fit its common bond.
• Inflation: none of the three guarantees what your money will buy later. NS&I says so on the Premium Bonds page itself.

How CrestCast Models Them

Add a savings pot and choose Savings, Premium Bonds or Credit union. Premium Bonds starts from the NS&I prize fund rate and the £50,000 limit as read from nsandi.com on 02/10/2026, names the pot for you, and does not ask the ISA question. Both figures are yours to change, and a balance over the limit shows a warning without blocking you. A credit union pot has no preset: you type the dividend or rate it pays.

The forecast grows a pot at the single rate you enter, so for Premium Bonds treat it as an assumption and try a lower one to see a cautious case. CrestCast marks Premium Bonds prizes as tax-free and credit union interest as taxable, but the forecast does not yet deduct income tax from savings interest on any pot. If your interest is above your allowance, enter the rate you expect to keep. A credit union loan goes in as an ordinary loan, with the credit union as the provider and its rate.