Premium Bonds US tax treatment differs sharply from the UK position. NS&I Premium Bond prizes are free of UK Income Tax and Capital Gains Tax, but a US citizen must still report them as taxable income on Form 1040. Because the UK charges no tax, there is no foreign tax credit to offset the US tax. The bonds themselves are also reportable on the FBAR and, above the thresholds, on Form 8938.
Premium Bonds are one of Britain's most popular savings products. They are issued by National Savings and Investments (NS&I), backed by HM Treasury, and pay prizes through a monthly draw instead of interest. For British savers, they are simple and tax-free. For the many Americans living in the UK, however, "tax-free" applies only on one side of the Atlantic. This guide covers what a US citizen needs to know.
How Premium Bonds work
You can hold between £25 and £50,000 in Premium Bonds, according to NS&I's Premium Bonds page. Each £1 bond is entered into a monthly prize draw. Prizes range from £25 to £1 million. NS&I sets an annual "prize fund rate", which it adjusts from time to time, so the average return varies. You can cash in bonds at any time without penalty, and the capital does not change in value.
The UK tax position
In the UK, Premium Bond prizes are exempt from Income Tax and Capital Gains Tax. They do not use your Personal Savings Allowance, and you do not report them on a Self Assessment return. This is why many UK savers, particularly higher-rate taxpayers, favour them over taxable savings accounts.
Premium Bonds US tax treatment
The United States taxes its citizens and green card holders on worldwide income, wherever they live. A UK tax exemption does not carry across, and that is the core of the Premium Bonds US tax problem. Therefore, a Premium Bond prize won by a US person is income for US tax purposes in the year it is paid.
How to report prizes on Form 1040
The IRS has issued no specific guidance on Premium Bonds. In our experience, the prudent approach is to treat each prize as ordinary income and report it on Schedule 1 of Form 1040 as other income, with a clear description. Because a prize is not paid for work, it is unearned income. Consequently, the Foreign Earned Income Exclusion on Form 2555 cannot shelter it. Convert each prize to US dollars at the exchange rate on the date it was paid, or use the IRS yearly average exchange rate consistently.
Why no foreign tax credit applies
The foreign tax credit on Form 1116 only offsets foreign tax you actually paid. Since the UK taxes Premium Bond prizes at 0%, there is no UK tax to credit. As a result, the full US tax on the prize is payable. For a higher-earning American in London, that can mean US federal tax at up to 37% on every prize (IRS, 2026 tax year).
| Question | UK (HMRC) | US (IRS) |
|---|---|---|
| Are prizes taxable? | No, exempt | Yes, ordinary income |
| Where reported | Not reported | Form 1040, Schedule 1 |
| Foreign tax credit available? | Not applicable | No, no UK tax paid |
| Is the holding reported? | No | FBAR, and Form 8938 above thresholds |
FBAR and Form 8938 reporting
Holding Premium Bonds creates information reporting even in a year with no prize. NS&I holdings are generally treated as a foreign financial account for the FBAR, FinCEN Form 114. If your foreign accounts total more than $10,000 at any time in the year, you must list your Premium Bond holding. Use its highest value in the year, converted at the Treasury's year-end rate, as our guide to the FBAR maximum account value explains.
Form 8938 thresholds
Form 8938, under the Foreign Account Tax Compliance Act (FATCA), has higher thresholds. For a single taxpayer living in the US, it applies above $50,000 at year-end or $75,000 at any time. For a single taxpayer living abroad, the thresholds rise to $200,000 and $300,000 (IRS, Comparison of Form 8938 and FBAR requirements). A full £50,000 Premium Bond holding alone can therefore push a US-resident saver over the Form 8938 threshold. Our FBAR and FATCA reporting page covers the penalties for missing either form.
Is a Premium Bond a PFIC?
Premium Bonds are a direct NS&I savings product, not a pooled investment fund. They are therefore generally not treated as a passive foreign investment company (PFIC), unlike many UK unit trusts and OEICs. That makes them simpler than most UK investment funds, although still less efficient than they appear for US taxpayers.
Are Premium Bonds worth it for Americans?
For a British saver, the tax-free status is the main attraction. For a US citizen, the Premium Bonds US tax position means that advantage largely disappears. Consider an illustrative American in Manchester holding £50,000 who wins £1,500 of prizes in a year. The figures are illustrative. The UK taxes nothing, but the IRS taxes the dollar value of the £1,500 at the saver's marginal rate. Meanwhile, the prize outcome is random, so the return can fall below a taxable easy-access account that pays a fixed rate. In contrast, UK savings interest taxed by HMRC generates a foreign tax credit that can offset US tax. Therefore, for many Americans, an ordinary UK savings account or a US-compliant option is at least as efficient.
Premium Bonds compared with an ISA
A Cash ISA has the same problem: tax-free in the UK, fully taxable in the US. Our guide to ISA tax for US citizens explains why ISAs often disappoint Americans. Premium Bonds share that mismatch but avoid the PFIC issues that affect Stocks and Shares ISAs holding UK funds.
What to do if you already hold Premium Bonds
First, gather your NS&I prize history for each calendar year. Next, check whether you reported prizes and listed the holding on your FBAR in past years. If you did not, the omissions can usually be corrected, and the IRS Streamlined Filing Compliance Procedures exist for non-wilful cases. Finally, decide whether to keep the bonds in light of their true after-tax return.
If you are an American in the UK and need help with Premium Bonds US tax reporting, book a consultation with our US-UK tax team. We report prizes and holdings correctly and compare the bonds with better-suited alternatives.
Frequently Asked Questions
Are Premium Bond prizes taxable in the US?
Yes, for US citizens and green card holders. Although NS&I Premium Bond prizes are exempt from UK tax, the US taxes its citizens on worldwide income. The prudent approach is to report each prize as other income on Schedule 1 of Form 1040 in the year it is paid.
Can I claim a foreign tax credit on Premium Bond prizes?
No. The foreign tax credit on Form 1116 only offsets foreign tax actually paid. The UK charges no tax on Premium Bond prizes, so there is nothing to credit and the full US tax is payable.
Do I report Premium Bonds on my FBAR?
Generally yes. NS&I holdings are treated as a foreign financial account, so if your foreign accounts total more than $10,000 at any time in the year, list the Premium Bond holding on FinCEN Form 114 at its maximum value for the year.
Do Premium Bonds count for Form 8938?
Yes. Premium Bonds are specified foreign financial assets for Form 8938. A single taxpayer living in the US must file above $50,000 at year-end or $75,000 at any time, and a single taxpayer living abroad above $200,000 or $300,000.
Are Premium Bonds a PFIC for US tax?
Generally no. Premium Bonds are a direct NS&I savings product backed by HM Treasury, not a pooled investment fund, so they are generally not treated as a passive foreign investment company. UK unit trusts and OEICs, by contrast, usually are PFICs.
Can the Foreign Earned Income Exclusion cover Premium Bond prizes?
No. The Foreign Earned Income Exclusion on Form 2555 applies only to earned income such as wages or self-employment profit. Premium Bond prizes are unearned income, so they are fully taxable in the US.
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