The National Savings and Investments (NS&I) prize fund rate for its Premium Bonds is rising from 3.7% to 4%.
It means from August the chance of winning will shorten from a one in 24,000 chance to a one in 22,000 chance.
Premium Bonds do not pay an interest rate to investors, but instead NS&I carries out a draw and hands out millions of cash prizes every month.
Winners get between £25 and £1 million, with more than 5 million prizes handed out in June 2023 alone.
There are always two £1 million giveaways, with the rest of the prizes depending on the size of the monthly fund.
In June 2023, 63 £100,000 prizes were also given out, as well as more than 13,000 £1,000 prizes.
The latest prize rate rise is the seventh increase in a year, in a bid to keep savers investing as interest rates rise for savings accounts.
Are Premium Bonds worth buying?
The Premium Bonds rate may have risen but this does not necessarily mean you will get more money back on your savings.
Unlike traditional savings accounts, Premium Bonds do not pay a guaranteed interest rate. If you want a return on your investment, you will be counting on a bit of luck as well, as Premium Bonds pay out to those randomly picked in the monthly draw.
Each bond costs £1, and each £1 bond has a chance of winning up to £1 million every month.
Many low-level investors choose to buy Premium Bonds when interest rates are low because they wouldn't get much money back in interest payments, so they may feel there is not much to lose.
They also have the benefit of being able to access their savings whenever they want, with no penalty for withdrawing, unlike with fixed rate savings accounts which offer the best interest.
When interest rates are high, savers may want to shop around for deals which have a guaranteed financial reward.
As of July 11 2023, NimbleFins' Best Savings Account Guide shows Shawbrook Bank is offering 4.35% interest on an easy access saving account (with a £1,000 minimum deposit).
FirstSave is offering a 6.1% fixed rate for one year.
These returns are guaranteed, unlike Premium Bonds.
However, for someone with a lot of savings, they may wish to buy Premium Bonds to avoid paying income tax on their interest.
Basic rate taxpayers pay 20% on anything they earn over £1,000. Higher rate taxpayers start paying tax on any interest over £500, at the higher rate of income tax (40%). Those in the additional income tax band have no savings interest threshold, so will pay the additional rate on everything they earn. The percentage of tax you pay is the same as your usual income tax band.
Plus, with winning rates also improving for Premium Bonds, some may wish to take a gamble in case they can take home a prize. In June 2023 there were more than 2.1 million £25 prizes handed out, 1.4m £50 prizes and 1.4m £100 prizes.
A total of £334m was handed out in more than 5m prizes.