Savings Accounts UK: Types, Average Rates, Tax and Protection

What Is AER? The Savings Rate Explained, With Gross Rates Compared

AER (annual equivalent rate) explained: what the figure savings accounts quote means, how it differs from the gross rate, how to work one out from the other, and what AER doesn't tell you when you compare accounts.

· · Last reviewed: · 2 min read

Savings and investment information is for educational purposes only. The value of investments can go down as well as up. Cash savings up to £85,000 per person per institution are protected by the FSCS.

Savings accounts in the UK quote an AER, and it’s the figure to compare them on, because it allows for how often each account pays interest.

What AER means

AER stands for annual equivalent rate. It shows what the interest rate would be if interest were paid and compounded (added to your balance, so it earns interest itself) once a year. An account that pays interest monthly and one that pays it once a year can be compared directly on their AERs.

In practice, a lump sum left in an account for a year grows by the AER, whether the bank pays interest monthly or yearly. £10,000 at a 4% AER is £10,400 after a year either way, before tax and as long as the rate doesn’t change.

AER and the gross rate

The gross rate (often written “gross p.a.”) is the rate paid without tax taken off. Unlike the AER, it doesn’t assume interest is added once a year:

  • for an account that pays interest once a year, the gross rate and the AER are the same;
  • for an account that pays interest more often, such as monthly, the gross rate is lower than the AER.

Worked example. An account pays a gross rate of 4% with interest paid monthly. Each month it pays a twelfth of 4%, and each payment earns interest in the months after it. Over a year that makes an AER of:

(1 + 0.04 ÷ 12)12 − 1 = 4.07%

Going the other way, an account with a 4% AER that pays monthly pays about 0.327% a month. That’s how the compound interest calculator turns the AER you enter into monthly growth.

What AER doesn’t tell you

AER makes rates comparable, but it doesn’t show everything that decides what you’ll earn:

  • Bonuses. An AER can include a bonus for a set period. After the bonus ends, the rate drops.
  • Variable rates. An easy access or notice account’s AER can change at any time.
  • Monthly deposits. A regular saver’s AER applies to each deposit from the day it’s paid in, so you earn far less in pounds than the AER suggests on the total (regular savers).
  • Access and terms. A higher AER can come with a notice period, a fixed term or a limit on withdrawals.
  • Tax. AER is before tax: see the Personal Savings Allowance.

So compare AERs between accounts of the same type, then check the terms. How to find the best savings account sets out the averages for each type to compare against.

Sources

  1. Barclays: saving terms explained
  2. HSBC UK: savings