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Whether you currently hold or are looking to open a savings account, you’ll most likely encounter the terms Annual Equivalent Rate (AER), gross rate and net rate.
While these are three ways of expressing the amount of interest paid by an account, you may not be familiar with the differences between each of these concepts and their uses.
The Annual Equivalent Rate (AER) shows how much interest you’ll earn over the course of the year, taking into consideration any compounding interest, bonuses and charges. As such, it’s commonly used to compare one account with another.
Our lump sum and monthly savings calculators use the AER to work out the returns you could get on your savings.
Our dedicated savings and ISA charts display interest using the Annual Equivalent Rate (AER), making it easy for you to find and compare the best rates.
Meanwhile, the gross rate is the amount of interest you’ll receive before any tax or other charges are deducted.
Any interest accrued on your savings is typically paid gross, with the basic taxpayer able to earn up to £1,000 in interest before needing to pay tax under the Personal Savings Allowance (PSA).
As for the net rate, this is how much you’ll earn after subtracting any tax or charges. This is seen less often now, with banks and building societies paying interest before tax is deducted.
This comparison table highlights some of the key differences and uses of the AER, gross rate and net rate:
AER |
Gross rate |
Net rate |
|
Does this interest rate take into account any income tax I may need to pay? |
No |
No |
Yes |
Can I use this rate to easily compare an account that pays monthly interest with an account that pays yearly interest? |
Yes |
No |
No |
Can I use this interest rate to compare a normal savings account with a cash ISA? |
No, as the AER doesn’t take into account any income tax you may have to pay. |
Yes, but keep in mind if you breach your Personal Savings Allowance you’ll need to pay tax on some of the interest earned with a normal savings account, meaning it won’t necessarily be a fair comparison. |
Possibly, as if you pay tax on your savings you could compare the net rate on a normal savings account with the gross rate on a cash ISA. However, this won’t work if one account has an introductory bonus of less than a year or pays interest at a different frequency (e.g. monthly or yearly). |
What if the savings account offers an introductory bonus – does the rate include this? |
Yes |
Yes |
Yes |
If the introductory bonus lasts less than one year, does the rate show what happens when this ends? |
Yes, as the AER shows the rate of interest you’d earn if you kept your savings in the account for a full year. Where the introductory bonus lasts for less than a year, this, and any period after the bonus finishes, is taken into consideration. |
No, as the gross rate only shows what you would earn at the outset, which includes the bonus. |
No, as the net rate only shows what you would earn at the outset, which includes the bonus. |
Does the rate show what the real return on my savings is, after inflation? |
No |
No |
No |
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
We all know that we earn interest on our savings. But what happens to the interest once we've earned it? It’s either moved (or paid) into a different savings or current account, or it stays in the same account and is added to your savings.
What does compound interest mean? Read out guide to find out more.
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With so many types of savings accounts out there, it can be difficult to know what would suit you best. That’s why we’ve made this handy guide.
We all know that we earn interest on our savings. But what happens to the interest once we've earned it? It’s either moved (or paid) into a different savings or current account, or it stays in the same account and is added to your savings.
What does compound interest mean? Read out guide to find out more.
With so many types of savings accounts out there, it can be difficult to know what would suit you best. That’s why we’ve made this handy guide.
With so many types of savings accounts out there, it can be difficult to know what would suit you best. That’s why we’ve made this handy guide.
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Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.
Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.
Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.
Moneyfactscompare.co.uk will never contact you by phone to sell you any financial product. Any calls like this are not from Moneyfacts. Emails sent by Moneyfactscompare.co.uk will always be from news@moneyfacts-news.co.uk. Be ScamSmart.