What does AER mean on savings UK?

AER (Annual Equivalent Rate) shows what you'd earn in interest over a full year including compounding. It standardises rates so you can compare accounts fairly: 5% AER paid monthly is equivalent to 5% AER paid annually due to compounding. Always compare AER.

What's the difference between AER and gross rate?

Gross rate is the simple interest rate before compounding. AER includes the effect of compounding (interest on interest). If interest is paid annually, they're the same. If paid monthly, AER is slightly higher than gross because each month's interest earns interest.

Is higher AER always better?

For comparing equivalent accounts, yes — higher AER means more interest. But also consider: access restrictions, minimum deposits, bonus rates that expire, and account terms. A lower AER with better access might suit you more.

How is AER calculated?

AER = (1 + r/n)^n - 1, where r is the nominal rate and n is compounding frequency. For practical purposes, just compare AER figures directly — the calculation is done for you. AER makes comparison fair regardless of how often interest is paid.

What Is AER? Savings Interest Rate Explained

AER helps you compare savings accounts fairly by showing the true annual return.

What AER Means

Simple Definition

AER	Explanation
Annual	Per year
Equivalent	Standardised for comparison
Rate	Interest percentage
Shows	True yearly return

Why It Exists

Problem	Solution
Banks say “5% interest”	But pay monthly/annually
Monthly is better	Due to compounding
Hard to compare	Different payment frequencies
AER	Shows equivalent annual return

How Compounding Works

Annual vs Monthly Interest

£10,000 Deposit	Annual Interest	Monthly Interest
Nominal rate	5%	5%
Year 1 interest	£500	£512
Why different?	No compounding	Interest earns interest

Monthly Compounding Example

Month	Balance	Interest (0.417%)	New Balance
Jan	£10,000	£41.67	£10,041.67
Feb	£10,041.67	£41.84	£10,083.51
Mar	£10,083.51	£42.01	£10,125.52
…	…	…	…
Dec			£10,511.62

The Difference

Payment	Year-End Total	Effective Rate
Annual	£10,500	5.00%
Monthly	£10,512	5.12%
Difference	£12	0.12%

AER vs Gross Rate

Definitions

Term	Meaning
Gross rate	Simple interest before compounding
AER	Including compounding effect
Net rate	After tax (rarely shown now)

When They’re Equal

If Paid	Gross vs AER
Annually	Same
Monthly	AER slightly higher
Quarterly	AER slightly higher

Comparison Table

Gross Rate	Paid	AER
5.00%	Annually	5.00%
5.00%	Quarterly	5.09%
5.00%	Monthly	5.12%
5.00%	Daily	5.13%

Using AER to Compare

Compare Like-for-Like

Account A	Account B
“5% interest”	“4.9% interest”
Paid annually	Paid monthly
AER: 5.00%	AER: 5.01%
B is better	(just!)

Real Comparison

Account	Rate Shown	Payment	AER
Bank A	4.80%	Monthly	4.91%
Bank B	4.95%	Annual	4.95%
Bank C	4.85%	Quarterly	4.93%
Best			Bank B

Bonus Rates

Watch Out For

Offer	Reality
“5% including bonus”	May drop after 12 months
AER shown	Includes bonus period
After bonus	Much lower rate

How Bonuses Affect AER

Account	First Year	Second Year
Rate with bonus	5.00%
Rate without		2.50%
Two-year AER	~3.73%
Misleading	If looking at year 1 AER

Reading the Terms

Check For	Why
Bonus duration	When it ends
Rate after bonus	Real long-term rate
Need to switch	When bonus ends

Fixed vs Variable

Fixed Rate AER

Feature	Details
Rate guaranteed	For fixed term
AER accurate	For full term
No changes	Until maturity

Variable Rate AER

Feature	Details
Rate can change	At any time
AER = snapshot	May not be earned
Track changes	Regularly

Example

Today’s AER	What You Might Get
5.00%	If rate stays same
5.00% → 4.00%	Average of ~4.50%
Depends on	Rate changes during year

Easy Access vs Notice vs Fixed

Typical AER Ranges (Example)

Account Type	Typical AER
Easy access	4-5%
30-day notice	4.25-5.25%
90-day notice	4.5-5.5%
1-year fixed	4.5-5.25%
2-year fixed	4.25-5%

What Affects Rate

Factor	Impact on AER
Access restrictions	More = higher
Longer fixed term	Often higher
Market conditions	All rates move
Provider	Competition

Tax on Savings

Personal Savings Allowance

Tax Band	PSA
Basic rate (20%)	£1,000
Higher rate (40%)	£500
Additional rate (45%)	£0

Gross vs Net

Modern Approach	Details
Interest paid gross	Tax-free up to PSA
AER shows gross	Before any tax
You may owe tax	If over PSA

Example

£20,000 at 5% AER	Calculation
Annual interest	£1,000
Basic rate PSA	£1,000
Tax due	£0
If interest £1,200	£200 taxed at 20% = £40

Summary

Term	Meaning
AER	True annual return with compounding
Gross	Simple rate before compounding
Use AER	To compare accounts
Higher AER	More interest (all else equal)

When Comparing	Check AER
Same account type	Higher is better
With bonuses	Check what happens after
Fixed vs variable	Fixed is guaranteed
Always	Compare AER not “headline rate”

AER Decision Tool
Account A AER	___%
Account B AER	___%
Higher = better	(for pure interest comparison)