What is AER vs gross interest?

You’ve been on the lookout for ways to grow your money. You’ve taken the first step and decided to open a savings account. And you’ve made it your mission to find the best interest rates in the UK. But, as you’ve probably noticed, that’s easier said than done.

With so many options out there, all the info can be overwhelming. Some savings accounts advertise gross interest rates, some say AER, and you’re left wondering what all that means.

Comparing one account’s gross interest rate to another’s AER is like comparing apples to oranges. Before you throw your hands up and scrap the whole idea of opening a savings account, let's take a step back and look at the differences between these two types of interest rates.

Gross vs AER — what’s the difference?

AER and gross interest are both ways of calculating and representing the amount of interest you can expect to earn on a particular savings account or investment over a year, expressed as a percentage. But the way they’re calculated is a little different. Distinguishing between these two will help you accurately compare and choose the best savings account for you.

What is gross interest?

The gross interest rate represents the annual interest rate you’ll receive on your savings, without taking any introductory bonuses or charges into consideration. It also doesn’t account for taxes that you’ll have to pay on your earnings or compound interest (more on that in a bit).

If you’re looking at the gross interest rate, just remember that this number doesn’t reflect the final amount you’ll‌ get — your net earnings will be somewhat lower.

What does AER mean?

AER stands for Annual Equivalent Rate. Like the gross interest rate, it’s a percentage that measures how much you’re likely to earn on your savings or investments over a year, but it’s calculated in a way that gives you a more realistic picture.

Unlike gross interest, AER takes into account any fees and bonuses that may apply. It also considers compound interest, which is the interest you earn on interest.

If you had to go back and reread that, you're not alone — it can be a bit confusing, so let's break it down. When interest is compounded, the amount you earn is added to the principal amount you've deposited at regular intervals. Every time your interest is compounded, you’re earning interest on your total balance, including the interest that’s already been added to your account.

Since AER takes all these moving parts into consideration, it's particularly useful when comparing different savings accounts and seeing which ones offer the highest returns. But heads up — like the gross interest rate, the AER doesn’t take taxes into consideration.

Bonus question — what does AER variable mean?

Just when you thought you understood AER, we threw another word in there: variable. This simply means that your provider can increase or decrease your savings account’s interest rate. They'll usually notify you before this happens.

How is AER calculated?

The formula for AER can be quite complex, but thankfully, most providers do the maths for us. Generally speaking, here are the steps you have to follow to calculate it.

1. Identify the compounding frequency. This is how many times per year interest is compounded. This could be yearly, quarterly, monthly, or even daily.
2. Calculate the periodic interest rate by dividing the gross annual interest rate by the number of compounding periods per year. This gives you the interest rate for each compounding period.
3. Apply the formula for AER by raising the result to the power of the number of compounding periods and subtracting 1. That’s your AER.

If that sounds complicated, don’t worry — you won’t have to crunch the numbers yourself. When you’re researching savings accounts, just remember to look at the type of interest rate that’s advertised. The AER will allow you to compare rates that may have a different compounding schedule for the most accurate view.

How much interest will I earn?

Let’s look at a real-life example to see how all this plays out.

Imagine you’re a Revolut Ultra customer and you deposit £1,000 into your Revolut savings account. You already know you’ll earn 4.75% variable AER compounded daily on your GBP balance, but what does that mean exactly?

Let’s start with the compounding frequency. Since interest is compounded and paid daily, you earn 1/365th of the gross interest rate on your closing balance every day.

The AER already considers that your balance will be incrementally higher each day because you’re earning interest on interest. All you have to do is calculate 4.75% of £1,000 to find out your expected earnings over the first year.

If you don’t add any more money to your savings and the AER doesn’t change, you’ll have earned £47.50 by the end of the year, and your total balance will be £1,047.50. Not bad, right?

Remember, this is pre-tax, so you may have to pay taxes on your earnings. In the UK, up to £1,000 of your interest earnings may be tax-free. This is called your Personal Savings Allowance, and the amount you’re eligible for depends on your tax band. Check out the UK government website for more info.

Other things to look for in a savings account

Of course, we all want the highest interest rates, but that’s not all that matters. When you’re comparing savings accounts, you’ll want to find one that suits your needs, preferences, and lifestyle.

Here are some other questions to ask yourself when researching a savings account.

• Are there any fees, penalties, or limits for withdrawing money? Some savings accounts require you to keep your deposit in your account for a specified amount of time. If you want to withdraw your money freely, go with an instant-access savings account for fewer restrictions.
• Are there any account maintenance fees? With some savings accounts, you’ll have to pay a monthly fee.
• Is there a minimum amount I need to keep in my savings account? Some banks or providers will require a minimum deposit to open a savings account, or a minimum balance to earn interest.
• Is there a maximum amount that earns interest? Some savings accounts are capped, so keep an eye out for that. If there’s an £80,000 max and you deposit £100,000, you won’t be earning interest on £20,000.
• Can I access my savings account via online or mobile banking? These features can make it a lot easier to add, withdraw, and track your savings without having to go to a physical branch.
• Can I get quality customer support? Find out what customer support channels your provider offers — whether it’s chat, email, phone, or in-person — and make sure you can get in touch with someone if you have any questions.
• Are my deposits insured? Many banks and providers have insurance companies or partner banks that cover a certain amount in your account. Find out what that amount is to make sure your money is protected.

Earn up to 4.75% variable AER¹ with Revolut

Watch your money grow every single day, with interest compounded and paid daily. Add money when you want to, take when you need to, and rack up your savings on auto with spare change round-ups.

Could there be a better way to turn idle cash into interest? Explore Revolut's savings accounts and join 45+ million global customers who are changing the way they money.

¹Interest rates vary depending on your plan. T&Cs apply.