Premium Bonds vs Gilts: Which Government-Backed Option Is Better?
Both Premium Bonds and gilts are backed by the UK government, making them among the safest places for your money. But they work very differently - and the right choice depends on your tax situation, time horizon, and what you want from your savings.
Quick Comparison: Premium Bonds vs Gilts
| Feature | Premium Bonds | UK Gilts |
|---|---|---|
| Backed by | HM Treasury | UK Government |
| Returns | Variable (currently 3.6% average) | Fixed coupon + price changes |
| Tax on returns | Tax-free | Income tax on coupons |
| Capital risk | None | None if held to maturity |
| Price risk | None (always £1) | Yes (market fluctuations) |
| Access | 3 working days | Sell on market (instant but price varies) |
| Minimum | £25 | Typically £100+ (or via funds) |
| Maximum | £50,000 | No limit |
What Are Gilts?
Gilts are UK government bonds - essentially IOUs from the British government. When you buy a gilt, you're lending money to the government in exchange for regular interest payments (called coupons) and the return of your capital at maturity.
The name "gilt" comes from the original certificates, which had gilded (gold) edges. Today, gilts are traded electronically and are considered one of the safest investments globally because they're backed by the UK government's ability to tax and print money.
Types of Gilts
Conventional gilts: Pay a fixed coupon and return face value at maturity. Most common type.
Index-linked gilts: Coupon and principal adjust with inflation (RPI). Good for inflation protection.
Short/Medium/Long gilts: Refers to time until maturity - from under 5 years to 25+ years.
Key Differences Explained
1. How Returns Work
Premium Bonds enter you into a monthly prize draw. The current prize fund rate is 3.6%, meaning that's the average return across all bondholders - but your individual return will vary based on luck. You might win nothing, or you might win £1 million.
Gilts pay a fixed coupon (e.g., 4% per year) regardless of anything else. You know exactly what income you'll receive. However, the price you pay for the gilt affects your actual yield - if you buy a 4% coupon gilt for £105, your yield to maturity will be less than 4%.
2. Price Risk
This is the biggest practical difference. Premium Bonds are always worth £1 each - you can cash them in at any time and get exactly what you put in (plus any prizes won).
Gilts have market prices that fluctuate with interest rates. When interest rates rise, gilt prices fall (and vice versa). If you need to sell before maturity, you might get back less than you invested. This was painfully demonstrated in 2022 when some long-dated gilts lost 30-40% of their value as rates rose sharply.
⚠️ 2022: A Lesson in Gilt Price Risk
During 2022, the UK 30-year gilt lost approximately 40% of its value as interest rates rose from near-zero to over 4%. Investors who needed to sell before maturity suffered significant losses. Premium Bonds holders, by contrast, faced no capital loss - only a reduction in the prize rate.
3. Liquidity and Access
Premium Bonds take 3 working days to cash out, and you always get £1 per bond. Simple and predictable.
Gilts can be sold instantly on the market, but at whatever price buyers are willing to pay that day. This "instant" access comes with price uncertainty.
Tax Treatment: The Critical Difference
This is where Premium Bonds often win for UK taxpayers:
| Tax Aspect | Premium Bonds | Gilts |
|---|---|---|
| Income/Prizes | Completely tax-free | Taxable at your marginal rate |
| Capital Gains | N/A (no gains possible) | Exempt from CGT |
| Counts towards PSA? | No | Yes (coupon income) |
For a higher-rate taxpayer (40%), a gilt yielding 4.5% gives an after-tax return of just 2.7%. Premium Bonds' 3.6% average is already tax-free, making them potentially better value despite the lower headline rate.
💡 Tax-Efficient Gilt Holding
If you want gilt exposure without the tax drag, consider holding gilts within a Stocks & Shares ISA or SIPP. Inside these wrappers, gilt income is tax-free - though you're using up valuable ISA allowance for a relatively low-risk, low-return asset.
Which Is Better for You?
Choose Premium Bonds if:
- You're a higher-rate or additional-rate taxpayer
- You want guaranteed liquidity with no price risk
- You're saving for an emergency fund or short-term goal
- You've maxed out your ISA allowance
- You enjoy the "lottery" element and prize anticipation
- You have less than £50,000 to save in this category
Choose Gilts if:
- You want guaranteed, predictable income
- You can hold to maturity (avoiding price risk)
- You're a basic-rate taxpayer with unused PSA
- You want to invest more than £50,000
- You're using them within an ISA or SIPP
- You want inflation protection (index-linked gilts)
Consider Both if:
Many sophisticated savers use both: Premium Bonds for accessible, tax-free savings up to £50,000, and gilts (often in ISAs) for longer-term fixed-income allocation as part of a diversified portfolio.
Calculate Your Premium Bonds Returns
See what you might realistically expect from Premium Bonds based on your holding amount using our Monte Carlo simulation calculator.
Frequently Asked Questions
Are gilts safer than Premium Bonds?
Both are backed by the UK government and have zero risk of capital loss if held appropriately (to maturity for gilts, any time for Premium Bonds). The main difference is price risk - gilts can lose value if sold before maturity, while Premium Bonds are always worth £1 each.
Can I hold gilts in an ISA?
Yes, you can hold gilts in a Stocks & Shares ISA, which makes the coupon income tax-free. This removes the main tax advantage Premium Bonds have over gilts. However, you're using ISA allowance for a relatively low-return asset.
What about gilt funds vs individual gilts?
Gilt funds (like bond ETFs) offer diversification and easy access, but they never mature - so you're always exposed to price risk. Individual gilts held to maturity eliminate this risk. For simplicity, many investors prefer Premium Bonds over navigating gilt fund complexities.
Do NS&I offer anything like gilts?
NS&I's closest product to gilts is their Guaranteed Growth Bonds or Income Bonds, which offer fixed rates for fixed terms. Unlike gilts, these don't have market price risk but typically have early withdrawal penalties.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Gilt prices can fall as well as rise. Past performance is not a guide to future returns. Consider your personal circumstances and consult a financial advisor for personalized guidance.