The savings account market seems straightforward until you try to compare two products. Then out come the acronyms — AER, gross rate, net rate, effective rate — and suddenly you're not sure if the 4.8% account is better than the 4.65% account or not. Add in different compounding frequencies, bonus rates that expire, and notice periods that vary from zero to 120 days, and it becomes genuinely difficult to know which account will put more money in your pocket.
Let's clear it up.
AER: The Number That Actually Matters
AER stands for Annual Equivalent Rate. It's the standardised figure all UK savings providers must quote, and it's the one you should use when comparing accounts. AER tells you how much interest you'd earn over a full year if you left your money untouched, expressed as a percentage — regardless of how often interest is actually paid out or compounded.
AER accounts for compounding frequency. An account that pays interest monthly and reinvests it will produce a higher AER than one paying the same headline rate annually, because monthly compounding means your interest earns interest sooner. AER makes all accounts comparable on a like-for-like annual basis.
Use our compound interest calculator to model how much any savings pot will grow over time at different AER rates. The results can be motivating — or if you're looking at 0.1% easy access accounts, mildly depressing.
Gross Rate vs AER
The gross rate is the stated interest rate before tax, quoted without adjusting for compounding frequency. An account paying 4.75% gross quarterly will have a slightly higher AER, because the quarterly payments compound when reinvested. The AER will therefore show as 4.84% or similar.
The net rate (now less commonly quoted since banks stopped automatically deducting basic-rate tax in 2016) was the gross rate minus 20% tax withholding. For most savers today, savings interest is received gross and declared on a self-assessment return if it exceeds the personal savings allowance — £500 for higher-rate taxpayers, £1,000 for basic-rate.
When comparing accounts, use AER. Always AER.
Compound vs Simple Interest in Savings
Simple interest pays out on the original principal only. If you deposit £10,000 at 5% simple interest, you earn £500 every year regardless of how long you've been saving — because the interest is paid out rather than reinvested. Over 10 years you'd accumulate £5,000 in total interest.
Compound interest pays interest on both the principal and the accumulated interest. Our savings calculator shows this effect clearly: the same £10,000 at 5% compound interest grows to £16,289 after 10 years — £1,289 more than simple interest, without doing anything differently.
Most savings accounts compound interest — meaning your interest earns interest. The difference between daily, monthly and annual compounding at the same headline rate is small in practice (AER accounts for this), but it illustrates why compound interest is considered so valuable over long time horizons.
Types of Savings Accounts: The Tradeoffs
Easy access accounts let you withdraw your money whenever you like, but typically offer lower rates in exchange for that flexibility. Rates can change at any time. Good for emergency funds and short-term saving.
Fixed-rate bonds lock your money away for a set term — usually one to five years — and pay a guaranteed rate throughout. You'll typically earn more than easy access in exchange for surrendering flexibility. If rates rise during the fixed term, you miss out. If they fall, you win. A gamble both ways, but a managed one.
Notice accounts require you to give advance notice before withdrawing, typically 30, 60, 90 or 120 days. They usually sit between easy access and fixed-rate on the interest scale, and suit savers who won't need instant access but want more flexibility than a bond allows.
Cash ISAs allow up to £20,000 per year to be saved tax-free. Interest earned inside an ISA doesn't count against your personal savings allowance, which matters more for higher-rate taxpayers and larger savers. Compare cash ISA rates using AER just as you would standard accounts.
The Compounding Frequency Question
Accounts that compound daily or monthly will outperform accounts that compound annually at the same gross rate, but the AER removes this variable for comparison purposes. The practical impact is small — the difference between daily and annual compounding at 5% over one year is roughly 0.06 percentage points. Meaningful over decades; negligible for a one-year fix.
Where compounding frequency matters most is over very long horizons — pension savings, lifetime ISAs, investments held for decades. In these contexts, the frequency of compounding has a real cumulative effect on outcomes.
Don't Ignore the Bonus Rate Trap
Many easy access accounts advertise an attractive headline rate that includes a 12-month bonus. After the bonus period expires, the rate drops — sometimes to a fraction of the original. If you open an account without noting the bonus expiry date, you may find yourself earning considerably less than you expected while feeling vaguely satisfied you did something sensible with your money.
Set a calendar reminder for the bonus expiry date. Compare rates again when it approaches. The best rate on offer at that point may well be somewhere else entirely.
The MoneySavingExpert best savings accounts guide is updated frequently and lists current top rates across all account types with bonus period information clearly flagged.
Putting It Together
When comparing savings accounts, lead with AER. Check whether the rate includes a bonus and when it expires. Consider whether your interest will exceed the personal savings allowance and whether a cash ISA wrapper makes sense. And use the compound interest calculator to model real outcomes rather than estimating in your head — small rate differences become significant over years.