Premium Bonds are a type of savings account offered by National Savings and Investments (NS&I) in the UK. With Premium Bonds, instead of earning interest, you are entered into a monthly prize draw where you can win between £25 and £1 million tax-free. Many savers like Premium Bonds because you can get tax-free prizes while still having easy access to your money. However, one common question is whether you need to declare Premium Bonds on your tax return.
Do you have to declare Premium Bonds for tax?
The short answer is no – you do not have to declare Premium Bonds for tax purposes in the UK. This is because any prizes you win from Premium Bonds are completely tax-free.
HMRC does not class Premium Bond winnings as income or capital gains. So you do not need to declare or pay any tax on any prizes up to the jackpot of £1 million. This tax-free status applies no matter how much you win or how frequently you win.
Why are Premium Bond winnings tax-free?
Premium Bonds winnings are exempt from UK income tax and capital gains tax due to legislation from HM Treasury. The main reasons are:
- Premium Bonds are considered a form of tax-free savings rather than an investment.
- The monthly draws are classified as lotteries, and lottery or gambling winnings are generally not taxed in the UK.
- There is an element of chance in Premium Bonds prize draws, so winners are seen as lucky rather than earning the income.
Therefore, the tax-free prize draw structure allows savers to potentially get tax-free returns on their nest egg. This unique tax treatment makes Premium Bonds an attractive savings option for many UK residents.
When do you need to declare Premium Bonds?
While you never need to declare Premium Bond prizes or winnings to HMRC, there are a few situations where your Premium Bonds may need to be declared or reported:
Declaring Premium Bonds on benefit claims
If you claim certain state benefits, you may need to declare the value of your Premium Bond holdings. Premium Bonds count towards capital limits for means-tested benefits like Universal Credit.
So even though you don’t pay tax on winnings, you still need to report your total Premium Bonds value when applying for certain welfare payments.
Reporting winnings of £50,000 or more
If you are very lucky and win a massive Premium Bonds prize of £50,000 or more, this will need to be reported to HMRC. Although you won’t pay any tax on it, HMRC requires NS&I to report all £50,000+ prize payouts for monitoring purposes.
Death of a Premium Bonds holder
When a Premium Bond holder passes away, the bonds may need to be declared on inheritance tax returns. The total value of the deceased’s Premium Bonds holdings will count towards their estate for IHT purposes.
Any winnings paid out after the date of death to the deceased’s NS&I account may also need to be reported to HMRC and the executor may need to pay inheritance tax if the estate exceeds the tax-free threshold.
Do you pay tax on Premium Bonds interest?
Premium Bonds do not pay any interest. Instead, NS&I enters bond holders into prize draws each month. So there is no interest to declare for tax purposes.
The key points about tax and Premium Bonds interest are:
- Premium Bonds have variable returns based on prizes instead of fixed interest rates.
- Your bonds earn no interest as such – you can only get a return by winning tax-free prizes.
- The estimated prize fund rate is currently 1.40%. This represents the average expected returns but bond holders are not guaranteed this.
- All prizes are completely exempt from Income Tax and Capital Gains Tax in the UK.
This lack of interest avoids situations where savers have to pay income tax or declare Premium Bonds returns. It is one of the reasons Premium Bonds are popular in the UK compared to fixed-rate savings accounts where interest earned is usually taxable.
Do Premium Bond winnings affect other taxes?
Premium Bond winnings have no effect on any other taxes you might pay in the UK. Some key points:
No impact on Income Tax bands
Your Income Tax bands and allowances are based on your taxable income. Because Premium Bonds prizes are not classed as taxable income, even large winnings do not increase your income for Income Tax purposes. Winning £25,000 for example would not push you into a higher tax bracket.
No effect on Capital Gains Tax
CGT is charged on taxable gains when you sell assets or investments. Premium Bond winnings do not count as capital gains, so do not affect your annual CGT allowance or tax rate.
No changes to Council Tax bands
In England and Scotland, Council Tax is based on property values rather than personal income or wealth. So Premium Bond winnings do not affect which Council Tax band your home is in.
No impact on Inheritance Tax
As mentioned earlier, the total value of Premium Bonds you own may count towards your estate for IHT purposes after death. But any tax-free winnings paid out to beneficiaries do not increase the inheritance tax liability.
How do NS&I report Premium Bonds winnings to HMRC?
NS&I are required to report all Premium Bonds prizes and winnings to HMRC on an annual basis. However, they only report payouts over £50,000 specifically.
Monthly prize draw reports
After each monthly Premium Bonds prize draw, NS&I will provide a report to HMRC with details of all the tax-free prizes awarded, including the bond holder’s details and the prize values.
Flagging of high-value winners
NS&I have automated systems that flag up any very large Premium Bonds wins of £50,000 or more. These high-value payouts are immediately reported to HMRC when processed.
Annual reporting by NS&I
At the end of each tax year, NS&I compile full details of all prizes distributed to Premium Bonds holders during the previous 12 months. This annual report is sent directly to HMRC and helps them monitor arbitrarily large payouts.
Winners do not have to report anything
Individual Premium Bonds holders never have to proactively report winnings to HMRC. NS&I provide all the information tax authorities need directly. Even for mega jackpot wins, you do not have to complete tax returns or self-assessment forms.
Do you have to declare Premium Bonds on a tax return?
You never need to manually declare Premium Bonds prizes, winnings or holdings on a Self Assessment tax return or any other HMRC form or documentation.
The key reasons why Premium Bond wins are not declared to HMRC by the bond holder are:
- Premium Bonds are tax-exempt savings, so any capital growth from winnings rather than interest is not considered a taxable gain by HMRC.
- NS&I already report all prizes directly to HMRC on your behalf.
- There is no legal requirement to declare lottery, gambling or prize draw winnings in the UK if they are not subject to tax.
- You do not have to declare the amount of Premium Bonds you hold for capital reporting purposes.
Unless you earn substantial taxable income from other sources, most Premium Bond holders do not complete annual tax returns. There is no specific box or section to report tax-free savings or prize winnings.
The tax-exempt nature of Premium Bonds means savers do not have any extra tax reporting responsibilities to comply with.
Do you have to declare Premium Bonds anywhere else?
Outside of tax reporting, you may need to declare Premium Bonds in a few special situations:
Asset reporting on benefit claims
As discussed earlier, Premium Bonds must be reported when claiming many income-related welfare benefits, as capital is taken into account when calculating entitlement.
Probate after death
Premium Bonds will need to be declared as part of the deceased’s estate during probate after death. The total bond value is used when calculating any inheritance tax liability.
Bankruptcy proceedings
If you are declared bankrupt, Premium Bonds must be declared along with all other assets and accounts in your possession. Premium Bonds form part of your total assets and collateral during bankruptcy.
Divorce proceedings
During divorce settlements, spouses are required to fully disclose all assets and finances, which includes any Premium Bond holdings. This ensures fair distribution of capital when dividing up marital assets.
What details are included on Premium Bonds prize checks and tax implications
When you win a Premium Bonds prize, you will receive a prize check from NS&I for your winnings. The prize checks include certain details about your win:
Your personal details
This includes your full name and Premium Bonds holder’s number. Your holder’s number identifies you and confirms the winnings belong to your particular Premium Bonds account.
Prize value
The prize check will clearly state the full amount you have won that month before any taxes or deductions. Even jackpot wins over £1 million will show the gross prize value.
Net prize amount
As Premium Bond winnings are tax-free, the net prize payout you receive will be exactly the same as the gross win value. No Income Tax, National Insurance or other deductions are taken by NS&I or HMRC.
Date and details of draw
The prize check shows the specific monthly draw when you were selected as a lucky winner, including the draw sequence number and date it took place.
Winning bond number
Your prize check specifies the individual Premium Bond bond number that was chosen in the random draw for that month. Each £1 bond is numbered separately for the draws.
As the checks are only for tax-free winnings, HMRC confirm there are no further tax reporting requirements for savers when depositing the funds. The money can be immediately spent or saved as you wish.
Do you have to declare Premium Bonds on a tax return if you don’t pay tax anyway?
Many Premium Bond holders have tax-exempt income that falls under Personal Allowance thresholds already. So even if Premium Bonds prizes were taxable, which they are not, these savers would likely have no extra tax liability to report.
In cases where individuals have no other income subject to tax, there is no requirement to complete an annual Self Assessment return solely to report winnings on tax-exempt assets like Premium Bonds.
So for basic or higher rate taxpayers who do not normally file returns, winning £1,000 or even £100,000 from Premium Bonds would not change this. HMRC only need to monitor bonds for extremely substantial payouts over £50,000 via NS&I reporting.
In summary:
- Non-taxpayers do not have to declare Premium Bonds wins of any amount.
- Only NS&I report details of prizes over £50,000 to HMRC.
- There is never any need for savers to self-report Premium Bonds winnings.
- Even large wins would not necessitate a tax return for those with no other taxable income.
So the tax-free treatment means Premium Bonds holders generally have no extra tax paperwork or reporting requirements.
Conclusion
Premium Bonds holders do not ever have to declare Premium Bonds winnings or holdings on UK tax returns. This includes the annual Self Assessment return.
Due to the specific tax-exempt legislation for Premium Bonds and NS&I’s reporting to HMRC, individual savers have no responsibilities to declare:
- Monthly or annual Premium Bonds prizes
- Jackpot wins up to £1 million
- Total amount of Premium Bonds owned
- Bond winnings paid into their NS&I account
The only exceptions are reporting total holdings for means-tested state benefits and during probate after death. Otherwise, Premium Bond holders can enjoy fully tax-free prizes without any extra administration or paperwork.