Premium Bonds US Tax: Cash ISAs and UK Savings Through American Eyes

Premium Bonds US tax treatment surprises most Americans in the UK: prizes that are tax-free in Britain are taxable income on a US return. A US citizen or green card holder reports every Premium Bond prize, every pound of cash ISA interest and all UK savings interest to the IRS. The good news is that Premium Bonds and plain cash ISAs are not PFICs, so the damage is ordinary tax, not the punitive fund regime.

This guide looks at the whole family of "safe" UK savings, Premium Bonds, cash ISAs, NS&I accounts and ordinary bank savings, from the point of view of the US return. If you are wondering whether your stocks and shares ISA is a bigger problem, it usually is, and we cover that in why your ISA is a problem on your US tax return.

Are Premium Bond prizes taxable in the US?

Yes. Premium Bond prizes are taxable income for a US taxpayer, even though NS&I states that prizes are exempt from UK Income Tax and Capital Gains Tax. The UK exemption is a matter of UK law, and the US taxes its citizens and green card holders on worldwide income regardless of where they live.

The US/UK tax treaty does not rescue the position. The treaty's saving clause lets the US tax its own citizens as if the treaty did not exist, apart from a short list of exceptions, and Premium Bond prizes are not on that list. Our guide to the saving clause in the US/UK tax treaty explains how far it reaches.

Premium Bonds are a savings product, not a lottery ticket you lose. NS&I describes a minimum purchase of £25 and a maximum total holding of £50,000, with prizes from £25 to £1 million drawn each month instead of interest. Your capital stays intact and can be cashed in. For US purposes, what matters is the prize income: that is the part that goes on the return.

How do you report Premium Bond prizes on a US tax return?

Premium Bond prizes are reported as income in the tax year they are paid, converted from pounds to US dollars. There is no IRS ruling written specifically for Premium Bonds, so the label varies between preparers. The total taxed is the same whichever line is used; consistency from year to year matters more than the label.

Three treatments are seen in practice:

• As interest. In substance the prize fund is the interest the bonds would otherwise pay, distributed by draw. Some advisers report prizes as foreign interest on Schedule B.
• As a prize. IRS Publication 525 says a prize won in a lucky number drawing or similar event must be included in income; the 2025 edition points prizes to Schedule 1 (Form 1040), line 8i.
• As lottery winnings. Publication 525 treats lottery and raffle winnings as gambling winnings (Schedule 1, line 8b in the 2025 edition). This label rarely helps, because your stake is never lost, so there are no gambling losses to set against it.

Whichever label applies, the prize is ordinary income taxed at your normal US rates. It is not a capital gain and it does not qualify for any reduced rate.

Converting prizes to dollars

US returns are prepared in dollars. Most individuals convert each prize at the rate on the day it was paid, or use the IRS yearly average exchange rate for income received evenly through the year. Pick one method and apply it consistently. Our post on the Foreign Tax Credit and UK tax relief covers how currency choices interact with credits.

Why is there no tax credit to offset the US bill?

The Foreign Tax Credit only credits foreign tax you actually paid. Premium Bond prizes and cash ISA interest carry no UK tax at all, so there is nothing to credit. The IRS Foreign Tax Credit rules also sort income into categories: savings income is "passive" income, and excess UK tax paid on your salary sits in the "general" category, so it cannot be used to cover US tax on savings.

The Foreign Earned Income Exclusion does not help either. It covers earned income only, such as wages and self-employment profit. Interest, prizes and dividends are unearned income and are always outside the exclusion.

That is the uncomfortable truth about UK tax-free savings for Americans: the UK tax break disappears on the US return, and there is no UK tax to offset the US tax. A UK-taxed savings account can sometimes leave you better off overall than a UK-tax-free one, because at least the UK tax generates a credit.

Premium Bonds US tax compared with cash ISAs and other UK savings

The table below compares the common UK savings products from both sides of the Atlantic. "PFIC risk" refers to the punitive US regime for foreign pooled funds, explained in our plain-English PFIC definition.

Product	UK tax	US tax	UK tax to credit?	PFIC risk	FBAR / Form 8938
Premium Bonds (NS&I)	Prizes exempt	Prizes taxable as ordinary income	No	No	Yes, counts
Cash ISA (bank deposits)	Interest exempt	Interest taxable	No	No	Yes, counts
Cash ISA holding a money market fund	Exempt	Taxable, PFIC rules may apply	No	Yes, likely	Yes, counts
Ordinary UK savings account	Interest taxable above allowances	Interest taxable	Yes, if UK tax was paid	No	Yes, counts
Other NS&I savings accounts	Interest usually taxable	Interest taxable	Yes, if UK tax was paid	No	Yes, counts
Stocks and shares ISA with UK funds	Exempt	Taxable; funds usually PFICs	No	High	Yes, counts

The pattern is simple. Everything is taxable in the US. The products that are tax-free in the UK give you no credit, and anything holding a pooled fund raises the PFIC question. The GOV.UK ISA guidance sets the UK allowance at £20,000 for the 2026 to 2027 tax year; the IRS gives that allowance no recognition.

Are Premium Bonds or cash ISAs a PFIC?

No, in their plain form. A Passive Foreign Investment Company is a foreign corporation that meets a passive income or passive asset test, which in practice catches UK unit trusts, OEICs, investment trusts and UK-listed ETFs. Premium Bonds are issued by NS&I, which is backed by HM Treasury; you hold a savings product, not shares in a foreign company. A cash ISA holding bank deposits is a bank account inside a tax wrapper, again with no fund involved.

The trap is the word "cash". Some investment platforms offer a cash ISA, or a cash option within a stocks and shares ISA, that is really a money market fund. A money market fund is a pooled fund, and a non-US one is very likely to be a PFIC, with a Form 8621 for each fund each year. If you are asking yourself "is my UK ISA a PFIC?", the answer depends on what is inside it, and our US/UK investor tax team can review the holdings line by line.

For anything that does turn out to be a PFIC, our PFIC reporting service handles the Form 8621 calculations and the elections that can soften the rules.

Do Premium Bonds go on the FBAR and Form 8938?

Yes. Premium Bonds should be treated as a foreign financial account held with a UK financial institution, and they count towards both US information returns. The IRS comparison of Form 8938 and FBAR requirements sets out the thresholds:

• FBAR (FinCEN Form 114): required when the aggregate value of all your foreign financial accounts exceeds $10,000 at any time during the calendar year. It is filed electronically with FinCEN, not with your tax return, and is due 15 April with an automatic extension to 15 October. See FinCEN's FBAR page.
• Form 8938: for taxpayers living abroad, required when specified foreign financial assets exceed $200,000 on the last day of the tax year or $300,000 at any time (single or married filing separately), or $400,000 and $600,000 for married couples filing jointly.

A £50,000 Premium Bond holding alone takes most people well past the FBAR threshold. Cash ISAs, current accounts, savings accounts and NS&I accounts all count too. Our guide to FBAR requirements for expats walks through which accounts to list, and Form 8938 vs the FBAR threshold explains when you need both.

How is ordinary UK savings interest treated?

Interest on an ordinary UK savings account is taxable in both countries, which is why it behaves better on a US return. In the UK, GOV.UK sets out the Personal Savings Allowance: up to £1,000 of interest tax-free for basic rate taxpayers, £500 for higher rate taxpayers and nothing for additional rate taxpayers, each tax year from 6 April to 5 April. Some people with low other income also get the starting rate for savings of up to £5,000, available where other taxable income is below £17,570 and reduced £1 for every £1 of other income above the Personal Allowance.

Any UK tax you pay on interest above those allowances can be claimed as a Foreign Tax Credit against the US tax on the same interest. Interest inside the allowance is UK tax-free and, like Premium Bond prizes, has no credit attached.

An illustrative example

Illustrative example: a US citizen living in Manchester is a UK basic rate taxpayer. In 2026 she holds £40,000 in Premium Bonds and wins prizes totalling £800. Her cash ISA pays £600 of interest, and an ordinary savings account pays £1,500. In the UK, the prizes and ISA interest are tax-free, and £1,000 of the bank interest is covered by her Personal Savings Allowance, so she pays UK tax only on £500 of interest. On her US return she reports all £2,900 of savings income, converted to dollars. She can claim a Foreign Tax Credit only for the UK tax on that £500. The £800 of prizes and £600 of ISA interest are taxed in the US with nothing to offset them. Her Premium Bonds, ISA and bank accounts together are far above $10,000, so she files an FBAR listing each account. The figures are invented to show the mechanics, not a forecast of anyone's tax.

What people get wrong about UK savings on a US return

1. Leaving out Premium Bond prizes because they are "tax-free". They are tax-free in the UK only. Omitting them understates US income.
2. Forgetting Premium Bonds on the FBAR. People list bank accounts and forget NS&I, often their largest single cash holding.
3. Assuming every cash ISA is just cash. A platform cash ISA invested in a money market fund can be a PFIC.
4. Trying to use the Foreign Earned Income Exclusion on interest. It applies to earned income only.
5. Expecting excess UK salary tax to cover savings income. Foreign Tax Credits are tracked by category, and savings income sits in its own passive basket.
6. Buying Premium Bonds for a US-citizen child without a plan. The child's prizes are the child's income for US purposes, and the account can push the child into FBAR filing once their accounts exceed $10,000.

Should Americans in the UK keep Premium Bonds?

Premium Bonds are one of the less troublesome UK products for a US taxpayer. They are not PFICs, the capital is returned in full, and the US reporting is limited to the prizes and the FBAR. The real question is the after-tax return. A prize that is tax-free in the UK but taxed at your US rate may be worth less to you than a UK-taxed account whose tax you can credit.

Before changing anything, compare the after-tax return on each option in both countries, check what your "cash" ISA actually holds, and make sure every account is on your FBAR. If you have missed prizes or accounts in past years, there are established routes to put that right, and the right one depends on your facts.

US/UK Cross Border Tax is US CPAs and UK tax advisers working as one team, with offices in London, Manchester, New York and San Francisco. We prepare foreign income and FBAR filings alongside UK Self Assessment for Americans living in the UK, so your savings are reported correctly on both returns. Contact us to have your UK savings reviewed before your next US filing.