Savings interest calculator: how is interest worked out?

by - 01/10/2026 in Savings

If you save money, the interest rate you receive tells you, as a percentage, how much money will be paid into your account. The higher the interest rate, the more money you'll receive.

Even a small variation in interest rates can have an impact over the long term, so it’s important to monitor the interest rate to ensure you have your savings in the right account.

How is savings interest calculated?

Compound interest is calculated as the interest you earn on a savings account added to your original deposit. Essentially, you earn interest on your initial deposit, and the interest that’s already been added. This creates a snowball effect that will help you grow your savings.

As an example (interest rate of 5%)

And so on. Over time, this creates a powerful tool to increase your savings.

How do payment frequency and compounding matter?

Interest is usually calculated daily based on your current balance. However, how often it's paid to you depends on the provider. Interest can be paid as follows:

Monthly: interest is added to your account at the end of each calendar month.
Annually: interest is paid once every 12 months.
End of Term: fixed-term savings accounts and fixed-rate ISAs usually pay your accumulated interest at the very end of the agreed term.

The timing of when interest is credited to your account is important from a compounding perspective as the earlier it’s in your account, the higher the balance, and the quicker compounding takes effect.

What is the AER (Annual Equivalent Rate)?

AER stands for Annual Equivalent Rate. This is the total interest rate calculated over a year, if you left your funds in your savings account (taking compounding into account).

This is useful because it gives you a great way to compare accounts and providers when interest is paid in different timeframes. For example, if one provider pays interest monthly and another annually, the AER will help you compare them.

What should you compare between accounts?

What is the AER? Often the best option for comparing accounts.
Is it a fixed or variable interest rate?
How often is interest paid? Monthly, annually or at maturity?
What happens to the interest rate after a withdrawal? Some providers may lower the interest rate if you make withdrawals.

Does tax apply? If you are comparing a savings account with a Cash ISA, the highest headline rate may not necessarily produce the highest return after tax.

Frequently asked questions

What is the best compound savings interest calculator?

Money Saving Expert has a website calculator that will tell you how much you’ll need to save each month and over how long a period to meet your saving goals.

Is savings interest calculated daily or monthly?

Providers may calculate interest on your balance daily but only pay interest monthly or annually depending on their individual terms and conditions. The best comparison in this instance would be the AER.

How much interest will I earn on my savings?

This will depend on your balance, the interest rate, how long the money is in the savings account for and if you make any additional deposits or withdrawals. To calculate the potential interest on your savings, try the MSE interest calculator.

Can I use the AER to compare savings accounts?

Yes. Comparing the AER gives you the most consistent comparison between accounts that pay interest in different ways. It’s still important, however, to check access restrictions, any bonuses, specific balance requirements and other account conditions, rather than relying solely on the AER.

What is the difference between AER and the gross interest rate?

The AER incorporates the calculation of compounding and provides an annualised figure for comparison, whereas the gross interest rate simply reflects the interest rate before tax.