The difference between 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