
What is AER and how it works: your guide to interest rates
Financial basics · 20 June 2025Nuria Macias Castro
What exactly is AER – and how does it impact your savings? Whether you’re new to banking or just want more clarity, we’ve got you covered.
If you’ve ever scrolled through a savings account offer and paused at the acronym ‘AER’, you’re not alone. It might sound technical, but it’s one of the simplest and most helpful concepts for anyone trying to grow their savings smartly. This article breaks down what AER really means, why it matters, and how it works.
What is AER?
AER stands for Annual Equivalent Rate. It’s a percentage that shows how much you could earn on your savings over a year — but it’s designed to reflect your returns more realistically than a flat rate.
Unlike gross interest, AER considers how often interest is paid. It also includes compound interest, which is the interest you earn on the interest you've already got.
If that sounds confusing, don’t worry. When interest is compounded, it gets added to your savings balance at regular intervals. Each time it’s added, it boosts your total balance — and your next round of interest is calculated on that bigger number.
Because AER includes all of that, it gives you a clearer idea of your true annual return — and it makes comparing savings accounts much easier.
Keep in mind: AER doesn’t factor in taxes, so the actual amount you keep may depend on your tax band and allowances.
How AER works with savings
AER simplifies the behind-the-scenes maths of saving. Your provider might pay interest once a year, every month, or even daily — and how often that happens makes a real difference to your earnings.
Here’s where AER helps: it rolls those differences into one simple percentage. That way, no matter how often interest is paid or compounded, you can compare accounts like for like.
Savings example: how AER is calculated
Imagine two savings accounts offering a gross interest rate of 3.00%. One pays interest annually, the other daily. Because the second account compounds interest more frequently, you’ll earn slightly more over the year.
- With annual interest: £1,000 at 3.00% = £1,030 after one year.
- With daily compounding: £1,000 at 3.00% AER = about £1,030.45 after one year.
That difference might seem small, but it adds up — especially on larger balances. And with AER, you don’t need to crunch the numbers yourself. It already accounts for the compounding.
When you’re researching savings accounts, just remember to look at the type of interest rate that’s advertised. AER helps you compare savings products that may pay interest on different schedules – monthly, quarterly, or even daily. The more frequently your interest is compounded, the better your total return will be.
Understanding compound interest
Compound interest is what helps your money grow faster. It means you earn interest not just on your original deposit, but also on the interest you’ve already earned.
Here’s how it works:
- Interest is added to your balance (daily with Revolut)
- That bigger balance earns interest next time
- The process repeats again and again
How your balance grows with daily compounding
Let’s say you deposit £2,000 into an account with a 2% AER, compounded daily. Over time, your balance doesn’t just grow from the original deposit — it grows on interest too. Here’s how that looks year after year:
Year | Interest earned that year | Total interest earned | End-of-year balance |
1 | £40.00 | £40.00 | £2,040.00 |
2 | £40.80 | £80.80 | £2,080.80 |
3 | £41.61 | £122.41 | £2,122.41 |
4 | £42.44 | £164.85 | £2,164.85 |
5 | £43.29 | £208.16 | £2,208.16 |
Pros and cons of AER
Benefits
- Realistic view of what you’ll earn
- Great for comparison between savings accounts
- Includes compounding — not just flat interest
Things to consider
- May not include fees or account-specific charges
- Doesn’t reflect tax — your final return depends on your tax band
What is the difference between AER and gross interest?
Gross interest and AER are both ways to show the interest you can earn on a savings account — but they’re not quite the same.
- Gross interest is the rate you’re offered before tax and without compounding. It shows the interest you’d earn on your initial balance over a year if interest weren’t reinvested. It’s a good starting point, but it doesn’t reflect the actual amount that will be added to your account.
- AER (Annual Equivalent Rate) includes the effect of compound interest — the interest you earn on the interest already paid. It gives you a more accurate idea of what you’ll earn over a year.
So if your account compounds interest more than once a year (like monthly or daily), the AER will usually be slightly higher than the gross interest rate. And that’s why AER is often the better figure to use when comparing savings accounts.
Just remember: AER and gross interest don’t account for taxes. Depending on your income, your actual return might be lower.
If you want to go deeper into how these two rates compare, check out our guide: AER vs gross interest?
What’s the difference between AER and APR?
While they’re both percentages that appear on financial products, AER and APR mean very different things.
- AER (Annual Equivalent Rate) applies to savings. It shows what you could earn over a year, including compound interest.
- APR (Annual Percentage Rate) applies to borrowing. It includes the interest rate and any charges you’ll pay on loans or credit cards.
So when you’re saving, look at AER. When you’re borrowing, compare APR.
How topping up monthly boosts your interest
Let’s say you open a Revolut Savings account with £3,000 and add £200 at the end of each month. You’re on the Premium plan, earning 3.49% AER, with interest compounded daily.
That daily compounding means your money starts working as soon as it hits your account — and each top-up earns interest from day one.
Here’s how that plays out:
- Month 1: you start with £3,000. At 3.49% AER, you’re earning around £0.29 per day. Over 30 days, that’s about £8.70 in interest.
- Month 2: you add £200 at the start of the month, so your new balance is £3,208.70 (including the previous month’s interest). At 3.49% AER, your daily earnings rise to approximately £0.31 — about £9.60 over 30 days.
- Month 3: another £200 brings your balance to roughly £3,418.30. Now you’re earning around £0.33 per day, which adds up to about £10.20 in month three.
By continually adding to your savings account, you’re increasing both your balance and your daily interest — and that interest keeps compounding. It’s how consistent savings, paired with a daily AER, quietly grow into something bigger.
Why save with Revolut?
You’ve got goals. We have a savings account that help you reach them faster.
Revolut Savings ccounts have good interest rates, daily compounding, and total flexibility. Your money works quietly in the background.
The interest rate you earn depends on your Revolut plan. Each plan offers different benefits, including different AERs. You can see a full breakdown of what's included with each plan — and which rate you'll get — on our plans page.
Your savings are protected
Savings with Revolut in the UK are protected up to £85,000 by the Financial Services Compensation Scheme (FSCS), through our partner bank.
You can also enable biometric security in-app for extra peace of mind.
How much tax will I pay on my savings?
AER tells you how much interest your money could earn, but it doesn’t include tax. Depending on your total interest income and your tax band, you might need to pay tax on your earnings.
In the UK, you may be eligible for a Personal Savings Allowance (PSA), which lets you earn some interest tax-free. The amount you’re allowed depends on your individual tax situation.
To check your current allowance or apply for tax-free interest, head over to the official UK government website: Visit GOV.UK.
Earn up to 4.75% AER¹ (variable) with Revolut²
Watch your money grow day after day, with interest compounded and paid daily. Add money when you want, take it when you need, 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 55+ million customers who are changing the way they money.
¹ Interest rates vary depending on your plan. T&Cs apply.
² The information provided is accurate as of 2 June 2025 and may not reflect future interest rates or product terms. Please refer to the app or website for the most up-to-date details.
Information is provided by Revolut Group Holdings Ltd Registration No. 12743269 UK but is not liable for any of the claims, offerings, or services described herein, nor are the representations made or opinions expressed in this topic the views and opinions of Revolut Group Holdings Ltd or Revolut subsidiary companies registered and licenced to provide Revolut products in local countries. For more information about Revolut and current product offerings in your local country, please visit https://www.revolut.com/.