Understanding Interest

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Every saver wants to earn as much interest as possible so it's a good idea to know what goes into determining a high interest rate to make sure you benefit from the best deal.

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How does the Base rate affect my interest payments?

The amount of interest you’ll earn on your savings will depend on several factors, one of which is the Band of England base rate. This is the ‘official’ interest rate for the UK, and the Bank of England set this eight times a year.

When the base rate changes this normally influences your own interest rates – if the base rate goes up then savers might benefit from an improved return, and vice versa.

How does compound interest work?

Compound interest is when the interest you earned on your savings earns interest in itself. This has a snowball effect and the more often this is applied, the more you’re adding to your existing savings. This is lost if you move your funds into a different savings account.

How often is compound interest paid on a savings account?

While it depends on which savings account you’ve chosen as well as the bank provider, the interest is usually paid yearly. However there are banks who also pay quarterly (every three months), monthly, and daily.

The more often your interest is calculated, the more you’re likely to get.    

How do interest rates work?

 You'll be paid either a fixed rate of interest or a variable rate of interest.

  • Fixed rates of interest: Fixed interest means you'll be paid at a set rate which won’t change during the term of the account. You'll know exactly how much you'll be earning in returns and the longer you keep your money in the account, the more interest you'll be making. If the rates do rise, however, savers won't be able to benefit as you pay for the lowered risk. You'll have more flexibility in accessing your funds and won't have to commit to a long-term contract.
  • Variable rates of interest: With a variable interest, the amount of interest you earn could go up or down at any time. The change depends on the base rate. While you risk losing money when the basic savings rate goes down, you also have the potential to earn more when the base rate rises.

How much interest will I earn on a savings account?

Your interest depends on your bank provider, the deal you picked, and what kind of savings account you choose. If you head to our comparison tool, you’ll find the most competitive interest rates for you to benefit from, along with any information you need to find the right product for you.

Which bank has the best saving interest rate?

The top ranking high-interest providers change constantly.

Certain types of savings accounts tend to offer higher interest rates as their restrictions and commitments are greater. The general rule being the more restrictive your savings account is, the higher the interest rate, but this isn't always the case.

It can help to stay on top of the most competitive deals by using our comparison tool to get the latest information on the highest saving interest.

What is AER and Gross?

The Annual Equivalent Rate (AER) is the official rate of savings accounts and makes it easier to compare rates offered by different banks and building societies. The AER assumes your interest rate based on if you were to leave your money in the savings account for a year, and it also factors in the compound interest.

As a result, when you look at the monthly interest paid by an account the AER shown will be higher than the gross rate. However, where interest is paid annually, the gross rate and the AER will be the same.

The gross interest rate is the amount of interest you will earn before income tax is deducted and like the gross rate, the AER shows how much interest you will earn before tax is deducted.

How much will I be taxed?

Since the introduction of the personal savings allowance (PSA) in 2016, you can now earn a certain amount of interest from your savings account without this money being taxed. How much you'll be taxed depends which tax band you fall into. The tax band is divided into three categories and is determined by your annual income.

  • Basic rate taxpayers, that is those whose income is less than £37,500 can earn up to £1000 in interest without the amount being taxed
  • Higher rate taxpayers (those earning up to £43,500) will be able to earn £500 of tax-free interest
  • Additional rate taxpayers that earn upwards of £150,000 won't able to benefit from the PSA

If you qualify for any of the below, you'll be able to pay less tax

  • The Annual savings allowance gives you an extra £5,000 of untaxed income if you earn less than £16,850
  • The Marriage Allowance allows you to move part of your personal allowance to your partner (up to £1,190) if you earn less than £11,850
  • The Married Couple's Allowance can reduce your tax bill
  • The Blind Persons Allowance means up to £2,390 won't be taxed

Savings calculator

If you have a goal in mind when it comes to savings, it’s a good idea to manage your spending habits accordingly. Whether it is a question of how stringent you have to be or alternatively, how much wriggle room you have when it comes to day to day expenses, the savings calculator will give you a good indication to inform your saving habits.

Our savings calculator will tell you how much you’ll have to save each month to see you reach your target.

Compare savings accounts

It’s a good idea to compare savings accounts and the benefits they offer rather than settling with the provider you’re currently with. The change is quick and hassle-free, and you’ll be able to benefit from a range of new rewards if you upgrade regularly and keep an eye out on what’s on the market.

Find out just which savings account has the best interest rates and rewards for you to benefit from. Just tell us a bit about what you’re looking for and your saving habits and we’ll give you a list of potential and tailored options you can go for. Compare the rewards and benefits offered and find out which is the most suitable option for you. Head to our savings account comparison now and find out how much more you can get with a quick, hassle-free switch.

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