Premium Bonds, cash and tax: where the money you might need should sit
The personal savings allowance and why higher-rate savers cross it at ordinary balances, the after-tax comparison that decides Premium Bonds against a savings account, cash ISAs, and what inflation does to money that sits still.
One lever among many. Optimising your plan shows every lever, which ones apply to you and how they interact.
Cash is the one asset everyone holds and few think about. Three things decide whether yours is working: whether the interest is taxed, whether the real return after inflation is positive, and whether you could actually get at it when the boiler goes.
The tax on interest
Interest is income above the personal savings allowance: £1,000 for basic-rate taxpayers, £500 for higher-rate, nothing for additional-rate, taxed at your band above that, and from April 2027 at 22%, 42% and 47%. At a 4.5% rate a higher-rate saver crosses the £500 allowance with just over £11,000 in the bank. Everything above is taxed at 40%, which turns 4.5% into 2.7%.
Premium Bonds: it depends who you are
The prize fund rate, 4.35% from the September 2026 draw, is tax-free and is the average across all bondholders. For a basic-rate saver inside the allowance, a 4.5% savings account pays 4.5% and beats it: on £20,000 the account expects £900 against £870 of prizes. For a higher-rate saver who has used the allowance, the same account nets 2.7% and the bonds win clearly: on £50,000, £2,175 of expected prizes against £1,350 of interest after tax, and an account would need to pay 7.25% gross to match. Two honest cautions: prizes are skewed, so most holders earn a little less than the rate and small holdings can win nothing; and NS&I changes the rate without notice. The Premium Bonds calculator finds your breakeven.
Cash ISAs, and inflation
Interest inside an ISA is never taxed, so once your interest exceeds the allowance a cash ISA at the same rate keeps what the taxable account loses: the savings growth calculator shows the gap on your deposits. From 6 April 2027 an under-65 can put at most £12,000 a year into cash ISAs, within the unchanged £20,000 overall allowance; at 65 and over the full £20,000 can still go into cash. Then the quieter tax: at 2.5% inflation £10,000 buys what £6,103 buys today after twenty years, and £100 in 1995 needed £206 in 2025 to buy the same on the ONS index. Cash is for the emergency fund and for money needed within a few years; beyond that it loses to inflation slowly and certainly: the inflation calculator shows how fast, and the emergency fund calculator how much cash the buffer actually needs.
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