Prize draws vs Premium Bonds: where should your spare cash go?
They do different jobs, so the answer depends on what you want. Premium Bonds are a savings product: your money stays safe and you can take it back any time, but instead of interest you get monthly entries into a prize draw, and plenty of bonds win nothing for years. A prize competition is the opposite trade. You spend a small entry you will not get back, in exchange for a shot at a large cash prize on odds you can check up front. Neither prize is taxed as income, and neither is a way to guarantee a return.
What each one actually is
Premium Bonds are run by NS&I and backed by HM Treasury. You put money in, it stays yours, and each £1 bond gets a number that goes into a monthly draw for tax-free prizes. You can cash the bonds in whenever you like and get your full stake back.
A prize competition is not a savings product at all. You pay a small amount to enter, answer a skill question, and go into a draw for a single cash prize of a set amount. The entry is spent whether you win or not, the same as a ticket to anything else.
What happens to your money
With Premium Bonds your capital is protected. The risk is a quiet one: inflation chips away at money that earns nothing, and a run of blank months is common, especially with a small holding.
With a competition the maths is blunt. Most entries do not win, and the entry money is gone. What you are buying is the size of the swing: tickets priced in pence, with a smallest order of a few pounds, against a prize worth thousands, on a stated cap you can check before you pay.
The part that makes a competition checkable
The strongest thing a capped competition has over a prize-draw savings product is that you can see your odds. Your chance is your tickets divided by the total number that can be sold, and that total is published up front.
Premium Bond odds are quoted per £1 bond per monthly draw (NS&I gives 21,000 to 1 at the time of writing, and the rate is variable), spread across prizes from £25 to £1 million, so the headline figure tells you little about a realistic outcome. A single prize of a set amount on a capped ticket count is a number you can actually work with.
What they have in common
Neither is taxed as income. Premium Bond prizes are tax-free, and HMRC's guidance treats prizes won by private individuals as outside income tax, so nothing is deducted and there is nothing to declare for the prize itself.
And neither is income. If you need your money to grow reliably, a savings account or an investment is the honest answer, and we would rather say so than pretend a competition is something it is not. A competition is entertainment with a real cash prize attached, best played with money you are happy to spend.
Please note.General information to help compare two different things, not financial advice. It does not account for your circumstances, and the terms of savings products change over time. Check NS&I for current Premium Bond terms and speak to a regulated adviser about your own finances.
Sources
- NS&I: Premium Bonds
- GOV.UK: Income Tax introduction (what you do not pay tax on)
- HMRC Business Income Manual BIM45090: prizes and incentives, tax treatment of recipient (gov.uk)
Checked against these sources on .
Common questions
Are both tax-free?
Yes, for a private individual. Premium Bond prizes are tax-free, and prize-competition winnings are treated as windfalls rather than income, so there is nothing to declare for the prize itself.
Do I get my money back if I do not win?
With Premium Bonds, yes: your stake is returnable in full whenever you cash in. With a competition, no: the entry is spent whether or not you win, just like any other ticket.