Figures relate to tax year 2025 (US)
Premium Bonds look like the perfect British savings product for an American. The UK Treasury backs the capital, and every prize arrives free of UK tax. The IRS, however, sees each prize as ordinary taxable income.
That sounds like bad news, but the full picture is better than it looks. So this guide covers how America taxes prizes, what reporting the holding triggers, and why Premium Bonds still beat most British alternatives for US taxpayers.
Key takeaways
- Premium Bond prizes are tax-free in Britain but taxable on your US return.
- There is no UK tax on the prize, so no foreign tax credit reduces the US bill.
- Your NS&I holding counts toward the $10,000 FBAR threshold.
- Premium Bonds are not funds, so the punitive PFIC rules do not apply.
- Other NS&I accounts pay interest, which is reportable in the normal way.
What is a Premium Bond?
Premium Bonds are a savings product issued by National Savings and Investments, backed by the UK Treasury. Instead of paying interest, each £1 bond enters a monthly prize draw. You can hold between £25 and £50,000, and cash the bonds in at any time.
Prizes range from £25 to £1 million, drawn from a fund set by an annual prize rate that NS&I adjusts periodically. Most holders win small amounts regularly rather than large sums. The capital itself never falls in value.
Britain calls it a prize. The IRS calls it income. Both are right about their own system.
Are Premium Bond prizes taxable in the US?
Yes. America taxes its citizens and residents on worldwide income, and the prize is income wherever it comes from. The UK exemption does nothing for your US return, because each country decides for itself what counts as taxable.
Most practitioners report prizes as other income, in the same way as lottery winnings, rather than as interest. According to the IRS guidance on gambling income (opens in a new tab), prize and lottery winnings are fully taxable. Because you never lose your stake, there are no offsetting losses to claim.
Consistency matters more than the precise line you choose. Pick one treatment, apply it every year, and keep the NS&I prize notifications as your evidence. Changing method later only invites questions.
Why does no credit reduce the bill?
Because the foreign tax credit only offsets tax you actually paid abroad. Premium Bond prizes carry no UK tax, so there is nothing to credit. The whole prize therefore meets US tax at your marginal rate.
The foreign earned income exclusion does not help either. It covers wages and self-employment income, not prizes or investment returns. So even an American who excludes an entire salary pays US tax on these winnings.
In practice the amounts are often modest. Someone holding £20,000 might win a few hundred pounds in a typical year, producing a small US bill rather than a painful one.
Why are Premium Bonds better than an ISA for Americans?
Because they are not investment funds. Most stocks and shares ISAs hold UK funds, which the IRS treats as passive foreign investment companies. That regime brings punitive tax rates and a separate Form 8621 for every holding, every year.
The bonds sidestep all of that. There is no fund, no annual gain to compute and no PFIC reporting. Our guide to the ISA and PFIC problem explains why that difference matters so much for Americans saving in Britain.
| Product | UK tax position | US tax position | PFIC risk |
|---|---|---|---|
| Premium Bonds | Prizes tax-free | Prizes taxable as income | None |
| Cash ISA | Interest tax-free | Interest taxable yearly | None |
| Stocks and shares ISA | Gains and income tax-free | Income and gains taxable | High, if it holds funds |
| NS&I Income Bonds | Interest taxable | Interest taxable, with credit | None |
Do Premium Bonds need an FBAR?
Yes, once your foreign accounts pass $10,000 in total at any point in the year. Per the FinCEN guidance on reporting foreign accounts (opens in a new tab), the test adds every account together. A £10,000 NS&I holding alone crosses the line.
You report the maximum value of the holding during the year, converted to dollars. For Premium Bonds that is usually straightforward, because the balance only changes when you buy, cash in, or reinvest a prize.
Form 8938 may also apply above its own, higher thresholds. Our guide to Form 8938 and the other international forms sets out which ones you actually owe.
Should an American hold them at all?
Often yes, for cash you want to keep safe and accessible. The capital stays protected, the reporting is simple, and there is no PFIC exposure. The trade-off is that the expected return after US tax may trail a well-paying savings account.
Compare the numbers honestly. The prize rate is an average, and most holders win less than that average in a given year. Interest from a savings account is predictable, and you can credit any UK tax on it against the US bill.
For many Americans in Britain the best answer is a mix. Keep an emergency fund somewhere simple, then decide on the rest with advice that covers both countries. Revisit the split each year, because prize rates, savings rates and your own tax position all move independently of each other.
Cashing in your bonds
Cashing in creates no US gain on the bonds themselves, because their sterling value never rises or falls. You simply receive your capital back. Nothing needs reporting as a sale on your US return.
The dollar value can still move, though. If sterling has strengthened since you bought, the dollars returned exceed what you paid. Personal currency gains of up to $200 per transaction are exempt, but a large balance deserves a check.
How do you report them properly?
Keep the records as you go, because NS&I prize notices arrive one at a time and are easy to lose. The steps below turn a year of small prizes into a clean return:
- Download your prize history from your NS&I account at year end.
- Convert each prize to dollars using the rate on the day it paid.
- Total the year and report it consistently as other income.
- Record the highest holding value during the year for the FBAR.
- Add the NS&I holding to your other foreign accounts for the threshold test.
- Check the Form 8938 thresholds against all your foreign assets.
- Keep the annual statements with your tax records.
A worked example
Take an illustrative example. An American teacher in Leeds holds £30,000 in Premium Bonds throughout 2025. She wins eleven prizes, totalling £475, which she leaves reinvested.
Converted at the rates on each payment date, her prizes come to about $610. She reports that as other income, and it adds roughly $130 to her US bill at her marginal rate. The foreign tax credit fully covers her salary, so this is her only US tax.
Her holding also takes her past the FBAR threshold, so she files one listing the NS&I account. Had she held the same money in UK funds instead, she would have faced PFIC reporting on every one of them. She also keeps a simple spreadsheet of each prize date and its dollar value. That record takes ten minutes a year and answers any later question about the income.
What about other NS&I products?
Most pay ordinary interest, which works more simply. Income Bonds, Direct Saver and fixed-term savings bonds all produce interest that is taxable in both countries. You report it on your US return and claim credit for any UK tax paid on the same income.
Every NS&I account counts toward the FBAR threshold, alongside your bank accounts. Older index-linked savings certificates are the awkward exception, because their inflation uplift needs careful treatment year by year.
What about Premium Bonds held for children?
Bonds bought for an American child belong to the child for US purposes. Any prizes are the child's income, and a child with enough unearned income may need their own return. Large prize totals can also bring the kiddie tax rules into play.
The FBAR follows the same logic. A child whose accounts pass $10,000 needs a report in their own name, which a parent signs. Grandparents buying bonds for grandchildren rarely realize this, so check the total each year.
Can you keep the bonds after leaving Britain?
Yes. NS&I lets existing holders keep their bonds after moving abroad, and prizes can still go into a UK bank account. The US reporting simply continues as before, with each prize on your return and the holding on your FBAR.
Check the practical side first. Keeping a British bank account open from abroad has become harder, and without one you may struggle to receive prizes.
Common mistakes and traps
Most errors here come from trusting the British label on the product. These are the ones we see most often:
- Leaving prizes off the US return because Britain calls them tax-free.
- Claiming a foreign tax credit on prizes that carried no UK tax.
- Forgetting the NS&I holding when adding up accounts for the FBAR.
- Ignoring bonds held in a child's name for their own reporting.
- Assuming the exclusion covers prizes because it covers salary.
- Switching treatment between interest and other income from year to year.
Where you missed earlier years, the fix is usually simple. Our guide to FBAR deadlines and penalties explains the reporting side, including what to do about past years.
How US UK Tax Accountants helps
We report every UK savings product on the right schedule, and include each account in your disclosures. Our FBAR and FATCA reporting service covers NS&I holdings alongside your bank accounts, pensions and investments.
In our practice NS&I bonds are one of the few British savings choices we rarely need to unwind. We set out the full picture on a fixed fee, agreed in writing before any work starts.
Check your UK savings
If you hold Premium Bonds or other NS&I savings, a short review confirms what belongs on your US return. Tell us what you hold and how long you have held it. You can book a consultation and hear back within one working day.
Last reviewed 14 September 2026 by the US UK Tax Accountants Tax Team. This article is general information, not personal tax advice — speak to a qualified US/UK tax adviser about your own position.
For the neighbouring question, Charitable giving across two tax systems: how to get relief in Britain and America walks through it in detail.
For the neighbouring question, UK investment bonds and the IRS: the wrapper that costs Americans the most walks through it in detail.
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Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
