Savings Accounts UK 2026/27 — Easy Access, Notice, Fixed Rate and Premium Bonds GuideWhat Is AER? Savings Interest Rate Explained
Understanding AER on savings accounts. How Annual Equivalent Rate works, why it matters, and how to compare savings rates properly.
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) |
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