How Savings Interest Works in the UK
Everything you need to know about savings interest rates, compound interest, AER, and the Personal Savings Allowance.
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How does savings interest work?
When you put money in a savings account, the bank pays you interest as a reward for keeping your money with them. The interest rate determines how much you earn, and compound interest means you earn interest on your interest over time.
What is AER?
AER (Annual Equivalent Rate) is the standard way UK banks advertise savings rates. It shows the total interest you would earn in a year, accounting for compounding. When comparing accounts, always compare AER rates.
Compound interest explained
Compound interest means you earn interest on both your original deposit and any interest already earned. The more frequently interest compounds (daily vs monthly vs annually), the more you earn — though the difference is usually small.
Personal Savings Allowance
| Tax band | Annual allowance |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
Most people do not pay tax on their savings interest thanks to the Personal Savings Allowance.
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Use our Savings Interest Calculator to see exactly how your money will grow over time.
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Last updated
Last reviewed: 2026-04-12T07:27:44.642Z.